One of the side benefits to all these interest rate increases by the Federal Reserve is that savers are now getting a bit of compensation. For at least the past ten years, keeping your money in a bank savings account or certificate of deposit has netted you virtually zero return. Now, we are seeing rates of 3-month CD’s at around 5% and even open savings accounts are paying north of 4%. Now granted, if inflation is running at 4%, you’re not staying very far ahead but its much better than inflation of around 2% and getting .15% on your savings.
So why the turnaround? Banks must compete for money with other institutions, such as the U.S. Treasury, municipalities, corporations, and money market funds. Banks make money on the spread between what they pay for money (deposits) and what they receive when they loan it out. When mortgage rates, for example, were at 3%, the bank couldn’t pay much more than .15% on deposits and make money. Today with mortgage rates at 7%, banks can pay closer to 5% on deposits and make money.
Another thing that benefited savers actually happened back in 2008 in the middle of the financial crisis, when deposit insurance was raised from $100,000 to $250,000 per account type per institution. One of a financial advisor’s biggest problems of the past decade has been where to park money that we don’t want to commit to stocks and other types of investments. Today, having an option of an FDIC insured account paying 4% to 5% is pretty enticing.
We don’t expect these rates to stay this high forever. As the economy slows from the effects of all these rate hikes, the Fed will begin to lower rates in an effort to keep the economy from going into a recession. That will once again drop interest rates on savings accounts and CD’s. So for now, we enjoy the fact that we can get a few nickels on our savings, but anticipate that those nickels will be fewer in the future.
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice. Copyright ©2023 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
