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Fed Decides to Pause: Effects on CDs and Savings Accounts?

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After more than two years of rate hikes, the Fed decided to pause at today's FOMC meeting. The signs of a cooling economy was the main factor. So what should savers do? The Fed did leave the door open for possible rate hikes in the future. So it might not be the end of higher rates.

This Bankrate article discusses some things to consider for both savers and borrowers. For CD investors, we may see the yield curve return to a more normal slope in which longer maturity CDs will have better yields over the shorter terms. But with concerns of a slowing economy, I think it's more likely that short term yields will fall more than the longer term yields will rise. Those concerns had been a factor for the inverted yield curve. Bankrate's suggestion is to stick with short maturities while keeping an eye on yields on all maturities and locking in on a 6-percent-plus CD when you find it.

There will be three more FOMC meetings this year (9/20, 10/24 and 12/12).
Comments
James
James (anonymous)   |     |   Comment #1
If the 'lag' between monetary action and inflation is shown not to exist here in the form of core cpi around its current state there will be another rate rise. If Bernanke lets inflation rise further the effect is fairly clear; the real return on CDs of any yield is eroded:)

The Fed can't really show a truly slowing economy as we are at or above trend currently, down from an unsustainable rate. Regardless, Bernanke is an inflation man - wait for another CPI in the .3 range.

If you believe inflation is going to increase or such you might want to go with a TIP direct from the treasury. You'll get a nice coupon payment and a real yield that is certain to be positive.

That said, it'd be nice if banks would offer CDs that have the features of TIPs, ie, a CPI adjustment.
Banking Guy
Banking Guy (anonymous)   |     |   Comment #2
Series I Savings Bonds is another option that tracks inflation which may be a good option. The fixed rate is only 1.40% but it has some nice tax features (see post)


With long term CDs, you can also get lucky if you lock in a high rate when inflation is spiking and then inflation goes down. One example was in the early 80's when a family member locked in a 15% 10-year CD. Fortunately, inflation did moderate so the real return on that CD through most of the term was great.

There are some banks that do offer CDs that are indexed with the Prime rate. Since the Prime rate is usually 3% above the fed funds rate, and the fed funds rate tends to rise to combat inflation, this would be similar to a CPI adjustment. I just posted on one today.