bank rates

Savings Grows Despite Falling CD Rates

Bankaholic.comOur astounding turn toward frugality is not being rewarded by the continuing swoon in CD rates.

The Commerce Department says the personal savings rate rose to 6.9% in May, the highest it’s been since 1993.

But certificates of deposit sure aren’t paying the returns that encouraged us to save 16 years ago.

Bankrate’s weekly survey of large banks and thrifts taken July 1 found the average annual yield for a:

Three-month CD declined to 0.57% from 0.58% the previous week. That’s the lowest average since Bankrate began tracking 3-month CD rates in March 1989.

Six-month CD fell to 0.85% from 0.87% — the lowest average since Bankrate began tracking 6-month CD rates in January 1984.

One-year CD fell to 1.15% from 1.16% — the lowest it’s been since April 2004.

Two-year CD rose to 1.53% from 1.47%. That’s a little higher than the 52-week low reached earlier this month. But taking a longer-term look, this is the lowest 24-month CDs have been since August 2003.

Five-year CD ticked up to 2.19% from 2.18%. Last month the average fell to the lowest rate since Bankrate began tracking 5-year CDs in January 1984.

Of course you can earn more than that if you use our extensive database of CD rates to search for better-than-average deals.

But the best rates you’ll find today are no better — and sometimes worse — than the average rates we were earning last summer and fall.

It’s certainly far less than we were earning the last time the savings rate was this high. In early July 1993 the average:

  • 6-month CD paid 2.85% APY, or three times more than today.
  • Two-year CD paid 3.70% APY, more than twice as much as today.
  • Five-year CD paid 4.99% APY, also more than twice as much as today.

That’s because the Federal Reserve is pushing interest rates artificially low to boost spending and rescue the economy from the recession caused by the financial industry’s reckless lending binge of the early 2000s.

To do that, the government-controlled bank has dropped what it charges commercial banks to borrow money to rock-bottom levels — 0% to 0.25% for overnight loans.

With the government providing so much cheap money, the banks can pay next to nothing for our deposits.

The Fed’s rate setting committee met in late June and concluded that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

How extended.

Many economists think Fed Chairman Ben Bernanke will be very cautious.

The common wisdom is that Bernanke won’t start raising interest rates until he’s sure the recession is over and a strong recovery is underway, and that isn’t possible until mid-2010.

But on Tuesday, San Francisco Federal Reserve Bank President Janet Yellen indicated that it might take much longer than that for the economy to stabilize.

“It’s not outside the realm of possibilities that the Fed funds rate could stay at zero for the next couple of years,” Yellen told reporters after a speech in San Francisco.

Yikes! A couple of years?

Seems like the nation’s new determination to save deserves more support — and better returns — sooner than that.

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