Savings Rates Drop, CD Rates Stable - Weekly Rate Update

The big news this week from the economic rate front is that the Fed reaffirmed its commitement to keep interest rates low for the foreseeable future. The news sent the stock market soaring, with the Dow hitting a 52-week high of 10,291. We now know that the Fed's easy money policy has indeed been successful at re-inflating the stock and commodity markets. Your mutual fund statements should be looking better than they did last March.

The good news for investors is bad news for savers. Savings rates continue to drift lower and while CD rates have stabilized, yields in the 1-3% range is hardly anything to cheer about. As I've written before, the only mitigating factor is that inflation is low, increasing the real relative deposit return.

CD and Savings Rates

The average savings rate according to the BestCashCow rate table dropped to a new low of 1.63% APY. That's down from 1.65% the week before and from 1.72% a month eariler. CD rates have mostly stabilized. The average one year CD rate is now 2.06% APY. That's the same average rate that we saw in October. Five year CD rates are currently at 3.35% APY down minimally from 3.39% APY in October.

Looking at the yield ratio we have developed for deposit accounts, we see that the spread between savings rates and 36-month CDs reached a new high two weeks ago. While it came down slightly, the trend is still up. This reflects the rate stability in longer term CD rates even as savings rates continue their glacial descent. The story is really the weakness in savings rates and the continued 0% Fed rate policy. That's driving the ratio. Until we see an actual increase in longer-maturity CDs, there's no reason to think there's an uptick in inflation or rate pressure. Banks are still awash in cash and cheap money from the Fed.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with soaring equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.