Smart About Money: Lowdown on CD Rates

Until very recently, conservative savers used to be able to earn 5 percent — or a lot more — safely, conveniently and locally with one-year certificates of deposit (CDs). People willing to go out a little longer could do even better.

And it wasn’t just older savers who went with CDs. People who had money they didn’t want in the market liked them. People who wanted an insured place to keep a windfall while they decided what to do with it. People who wanted to diversify where they kept their assets. Lots of people liked dependable CDs for all kinds of good reasons.

Then the economy started tanking in 2008. It’s easy to forget now how things seemed then, but the mortgage meltdown had the chance to take down the economy worldwide. People were afraid of what it all meant, including people in the government.

To keep savers from panicking, the FDIC raised the limit on fully-insured accounts from $100,000 to $250,000. That was a very smart move.

Unfortunately, the government’s other big move hasn’t worked out as well for savers. Fearing a recession, the Federal Reserve started cutting their benchmark rates, which impacted all the other rates in the economy, including corporate borrowing rates along with certificate rates and mortgage rates.

Their plan was to stimulate the economy — to make it less expensive for businesses to borrow the money they needed to expand. It was a good idea, but this time, businesses sat on the sidelines, waiting to see what would happen next. So the Fed kept cutting and cutting, hoping to get businesses to act.

The Fed did that for seven years. And while it’s fair to say that lowering rates may possibly have made some businesses more likely to borrow, this has been a very slow recovery. In fact, the Fed recently reversed course and started raising rates. They hope that will spur other sectors of the economy.

Will it? No one knows. The fact is that economic news is never reported positively. When the economy is going gangbusters, the media warns us it could cool down. When it’s cool, they imply things will never, ever get better.

Right now, certificate rates are still fairly low because the Fed is raising rates slowly. Every community banker wishes they could pay more on CDs, because they know the difference it would make for their savers. But bankers have to deal with market realities, and paying more than the competitive market rate would not be prudent.

There are always great investment alternatives out there, and it is possible to earn more. But those alternatives also tend to carry more risk than insured certificates.

What can conservative savers do right now? First, decide what you’re looking to accomplish with your money. If 100-percent guaranteed safety is your primary concern, then CDs — even at the current rates — could still be right for you. The talk will always be that you should seek to earn “more, more, more,” but there is no need to take unnecessary risks for a “maybe” return on another investment.

If you do need your savings to generate more income, ask a lot of questions about any investment you’re considering, especially about fees, hidden fees, and the possibility of negative return or loss of principal.

I don’t say that to scare you! I say that because if you’re moving away from uncomplicated, government-insured certificates into other kinds of nonguaranteed investments, you want to be absolutely sure of what you’re getting into before you jump. If need be, work with an objective financial professional to evaluate your options. It will be money well spent.

Nick Maffeo is the president & CEO of Canton Co-operative Bank in Canton. Have a question? Email to submissions@thecantoncitizen.com.

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Posted by Nick Maffeo on Jan 29 2016. Filed under Featured Content, Opinion, Smart About Money. Both comments and pings are currently closed.