Thursday, 22 July 2021 14:45

Why Are CD Rates So Low?

By David Rath, CFA, Continuum Wealth Advisors | Business
Why Are CD Rates So Low?

Fresh out of college, I secured my first job as a personal banker for a national retail bank. A common complaint I heard in my first few months was that CD rates had started to fall below 5%. What we wouldn’t give for a risk-free 5% now, right? If we go further back in time, folks who were around in the 80s will tell of double-digit rates on both their CDs and their mortgages. Let’s examine the driving forces behind why rates are what they are.

The story starts with the Federal Reserve (“the Fed”), America’s central bank. They serve many functions but one of their most visible is setting the interest rate that banks charge each other for overnight loans, known as the Federal Funds Rate. This rate impacts a lot which is why it is so widely discussed. It is currently set to a range of 0.00-0.25%. Without getting into the inner workings, think of the rate as a dial for the economy. If the Fed believes that the economy needs a boost, it will set interest rates lower to make money flow more freely (as it did during the onset of the COVID-19 crisis in March 2020). They do the opposite when there is a risk of the economy “overheating” and inflation becoming a problem. It is a delicate balancing act as they try to keep the economy running on all cylinders while at the same time making sure inflation is in check. 

“Thanks for that,” you say, “but I asked about my six-month CD paying 0.45%.” Fair enough. As was previously mentioned, the Federal Funds Rate is the rate charged for overnight loans between banks and it provides a starting point for setting rates that carry longer times to maturity, like your six-month CD. Typically, the longer something is held, the more that the person lending that money will require in terms of payment. As a purchaser of a CD, you are effectively lending money to the bank and the rate they are willing to pay will be slightly higher than the Federal Funds Rate. As such, as long as the Fed Funds Rate stays pinned to the floor as it currently is, do not expect the interest rates on CDs, money markets, or savings accounts to meaningfully budge.

An unfortunate side effect of low rates is that those who need steady income (i.e., retirees) have seen the interest they can generate from these safe holdings dwindle to near nothing. However, it is all relative, and times of elevated rates on CDs are typically accompanied by either high current or expected inflation. A CD earning 6% per year while inflation is 7% is technically losing money overall. Let me conclude by saying that the percentage of your wealth to be held in these short-term instruments should be viewed through the lens of your personal financial picture. Hold too much and your risk becomes inflation. Hold too little and your risk becomes stock or bond market fluctuations. Much like the setting of those interest rates, it is a delicate balancing act. 

For more information, visit contwealth.com

David Rath, CFA is the Director of Portfolio Strategies at Continuum Wealth Advisors in Saratoga Springs.

Read 510 times

Blotter

  • COURT Krista S. Jenkins, 26, of Corinth, pleaded Aug. 26 to felony grand larceny, in connection with an incident in Greenfield in 2020. Sentencing Sept. 22.  Brittaney L. Tatsey, 28, of Troy, pleaded Aug. 26 to criminal possession of a controlled substance, in Moreau. Sentencing Oct. 28.  Ashley Sweeney, 38, of Mechanicville, pleaded Aug. 27 to felony burglary, and misdemeanor DWI, in Halfmoon. Sentencing Oct. 29.  POLICE Kellyann Biggs, 41, of Rotterdam, was charged Aug. 30 in Saratoga Springs with criminal contempt, a misdemeanor.  Kasey O’Herron, 35, of Greenfield Center, was charged Sept. 1 in Saratoga Springs with felony DWI,…

Property Transactions

  • BALLSTON Colleen Furey sold property at 11 Jenkins Rd to Lizabeth Cole for $235,000 Hui Ran sold property at 50 Sycamore St to James Twomey for $395,000. New York Development Group Ballston sold property at Brookline Rd to Brookview Court Inc for $1,086,500. Eastline Holdings LLC sold property at 14 Basswood Ct to Brian Murphy for $418,490. Renee Claus sold property at 151 Middleline Rd to Kyler Wang for $250,000 Dale Lukoff sold property at 51 Forestbrook Dr to Mark Kelly for $444,900. Marlene Rohe sold property at 6 Sharon Lane to Thomas Quaresimo for $150,000. Jane Esterly sold property…
  • NYPA
  • Saratoga County Chamber
  • BBB Accredited Business
  • Saratoga Convention & Tourism Bureau
  • Saratoga Springs Downtown Business Association