bank rates

Top Return On 5-Year CDs Falls Again

Last week we said all of the momentum 60-month CDs gained in 2014 had probably been lost.

Now we’re sure of it.

The top nationally available 5-year CD rate on our CD Rates Leaderboard has fallen for the second time this year.

First Citizens State Bank, which had been paying the best nationally return of 2.35% APY since last fall, decided to only sell CDs to local customers at its four north Florida branches.

That pushed CIT Bank into the lead with a rate of 2.30% APY.

Today the online consumer bank of CIT Group Inc., a New York-based company that finances small and midsize businesses, cut its return to 2.25% APY.

That drops CIT into a tie with four other banks for the best national deal on 5-year certificates of deposit:

  • Barclays, which is the online American operation of the worldwide British bank with more than $2 trillion in assets, has no minimum balance requirement.
  • GE Capital Bank, an online bank owned by the financial services unit of the manufacturing giant, requires a $500 minimum deposit.
  • Nationwide Bank, an online bank owned by Nationwide Mutual Insurance Co., requires a $500 minimum deposit.
  • Synchrony Bank, an predominantly online bank with a single branch in Bridgewater, New Jersey, requires a $25,000 minimum deposit.

It’s not just the fact the top nationally available rate has been cut twice in the past couple of weeks.

Or that it hasn’t gone up since early September.

Throughout most of 2014, the majority of the banks we track increased the yield on 5-year CDs we they revised rate sheets.

During the first three weeks of 2015, they were lowering them.

State Farm Bank and Astoria Bank, for example, cut their returns by a tenth of a point to 2.00% APY and 1.65% APY, respectively.

EverBank did raise its 60-month rate today, from 2.00% APY to 2.05% APY, but we’re not considering that a win. The Florida-based bank typically changes rates every Friday, and just two weeks ago was paying 2.25% APY.

What’s driving this reversal?

Uncertainly about what the Federal Reserve is going to do.

The Fed has driven short-term interest rates to record lows by drastically reducing what’s called the federal funds rate. That’s what commercial banks pay to borrow money from each other through the Fed.

Since it’s been essentially zero since December 2008, banks have been able to get pretty much all of the money they need for loans through the Fed for essentially nothing.

When the banks didn’t need our deposits, they slashed rates and savers responded by dramatically reducing the amount of money they have invested in CDs, from $1.45 trillion dollars in early 2009 to just over $500 billion today.

Six months ago the economy was finally showing signs of robust growth and all of the statements emanating from the Fed indicated that it would start pushing interest rates higher in 2015.

Indeed, higher rates seemed almost inevitable. Perhaps as early as April. Certainly no later than June or July.

That created some pressure on the banks to begin raising the returns on CDs and savings accounts – or at least not to cut them any further – to attract investors and rebuild their deposit base.

But since then the economic situation in Europe has deteriorated and it’s on the brink of another recession and perhaps even a period of deflation — a time when prices are falling that’s far more dreaded than runaway inflation.

The chronic problems there will undoubtedly hurt the economy here, and that’s weighing heavily on the Fed’s rate setting committee.

Earlier this month Chicago Fed President Charles Evans, a voting member of that committee, went on CNBC to say he didn’t think rates should be raised until 2016.

The Fed might very well proceed with its plans to start pushing interest rates higher this summer.

But that seems a lot less inevitable than it was last fall and the banks seem to be pausing, and perhaps even scaling back, any plans to raise rates until they can figure out what the Fed intends to do.

They’ll be watching for any clues after the rate setting committee holds it first meeting of the year next week.

So will we.

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