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Pause in Rate Hikes? Effects on Savings Accounts/CDs?

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Fed Chairman Ben Bernanke gave some signs while speaking to Congress today that the Fed may pause in its 22-month rate hike campaign.

As this Reuters article describes, there is more doubt about another rate rise by the Fed in June. The Fed is still widely anticipated to lift rates for the next Fed meeting on May 10th from 4.75% to 5.00%.

Future Rates on Savings Accounts? CDs?

I think it's safe to say that we won't be seeing interest rates rise like they did last year. Last year, the yields on internet savings accounts increased by around 0.75% to 1.5% (see chart). Last August, Corus Bank's 6-month and 12-month CD were at 4.04% and 4.37% APY. Now they're at 5.15% and 5.30% APY. So with a slow down of interest rate hikes, we probably shouldn't expect this same change over the next year. Let's say we only see half the rate change. So next year, we would see savings account rates about 0.5% to 0.75% higher than today. So EmigrantDirect may only be around 5% to 5.25%. GMAC Bank may be around 5.50%. Corus Bank's 1-year CD rate may be around 5.80% or about 0.50% higher than today.

Long Term CD Rates?

Lately there have been signs of increasing long term rates. So we may see more deals in longer term CDs like the new 6% 3-year CD at Penfed (see post).

With increases in long term rates, CD ladders may make more sense. I describe in this post a special type of CD ladder that can be done at Self-Help Credit Union (SHCU). SHCU's certificates of deposit have the nice feature of allowing additional deposits. With only a $500 minimum deposit requirement, you can buy long term CDs with only $500. If rates go down, you just add to the long term CD. SHCU has some decent CD rates although they change daily. They usually change by only a few basis points, but there have been a couple of occasions in the last 6 months when they've changed by up to 0.50%. SHCU's CD rates have been improving lately. The 5-year, 2-year and 1-year CD APYs are currently at 5.38%, 5.30% and 5.04%.
Comments
Steve Holt
Steve Holt (anonymous)   |     |   Comment #1
IMHO, Ken we are nearing the end of the rate hikes. Or at least a pause. I have been starting to look into longer term CD's (as you notice their rates are starting to come up finally).

I'm glad to see you bring up Self-Help CU again. It's a great way to lock in decent rates with a minimal $500 investment. Even if you don't need that security blanket when other CD's mature (and rates at that time are higher than your SHCU's rates) it's nice to have that option to add to them later. Even if you don't use it, just keep the $500 in their to cover all your bases.

Just be advised SHCU's interest penalties are half of the interest earned in a CD. For example a 5 year CD would have a interest rate penalty of 2 1/2 years for early withdrawal...ouch!!!

Another way to get around SHCU's daily rate changes is include a letter with your application and state the lowest interest rate or APY you will accept. If it lower than that rate include instructions as to what to do (ie send back money and application or call you to let you know what rate CD will be opened at). I have spoken to two CSRs and they assured me that this method would be accepted. I'm in the process of doing it know.

Thanks again for a great site.
Banking Guy
Banking Guy (anonymous)   |     |   Comment #2
Sounds like SHCU has changed ts early withdrawal policy? They use to not allow early withdrawals at all.

The half-of-interest earned penalty is substantial compared to the typical 6-month penalty, but it's definitely better than not allowing early withdrawal.

Thanks for the info the CD application instructions. I had considered about opening a money market account with SHCU and specifying that the CD be funded from the money market account. That would allow me to do ACH transfers into and out of the money market account using another bank's ACH system (like GMAC).

The SHCU MMA's yield is only 4.16% with a $500 minimum to avoid fees, but that's not too bad for the extra flexibility.
Steve Holt
Steve Holt (anonymous)   |     |   Comment #3
Ken - when I talked to SHCU CSR they said there were two ways to narrow down the rate at which your CD is opened. The letter with the application way and also open up a money market account. Then when you are ready to open a CD just call them and transfer the money from your MM to the CD. I was told you would get the CD rate of that day. So that way should work also.