When 2010 had started it had been over a year since the Fed slashed the Fed funds rate to near zero. So it seemed reasonable that interest rates would probably be going up sometime during 2010. Here's what one deposit account "expert" and blogger said in this Moolanomy blog post:
So what is the best cash strategy for 2010?
If you pay attention to CD rates you know that they’re at the lowest levels since the 80s right now. So it doesn’t make much sense to lock in to a long term CD right now because they’re bound to increase when the unemployment rate drops and the Fed decides to raise interest rates.
As you know, rates have only fallen since 2010. I took a look at some deposit rates at the start of 2010. Here is how some of them have changed in the last two years:
- PenFed 5-yr CD APY: 3.50% in Jan 10, 2.50% in Jan 11 & 2.25% in Dec 11
- Ally 5-yr CD APY: 3.10% in Jan 10, 2.40% in Jan 11 & 1.79% in Dec 11
- Alliant CU 1-yr CD APY: 2.10% in Jan 10, 1.30% in Jan 11 & 1.10% in Dec 11
- Ally 1-yr CD APY: 1.84% in Jan 10, 1.27% in Jan 11 & 0.99% in Dec 11
- ING Direct Sav APY: 1.30% in Jan 10, 1.10% in Jan 11 & 0.85% in Dec 11
- Ally Sav APY: 1.50% in Jan 10, 1.09% in Jan 11 & 0.89% in Dec 11
- Alliant CU Sav APY: 2.00% in Jan 10, 1.15% in Jan 11 & 1.15% in Dec 11
As you can see, CDs have returned more than savings accounts in the last few years. It's very hard to predict future interest rates. So if you're considering changing your CD ladder plans based on your expectation of future interest rates, be careful. You might be surprised in how interest rates turn out.
Based on the Fed's mid-2013 pledge, I think higher deposit rates are unlikely for 2012. If we do see improvements in the economy and inflation rises, it's possible that we may see some increase in long-term rates. However, as we learned this year, no matter how low interest are, it's always possible for interest rates to fall (except when rates fall to zero).
One reason for choosing a CD ladder is that it doesn't require predicting future interest rates. One change you might want to make to your CD ladders is to choose CDs with mild early withdrawal penalties. That will make breaking CDs less costly if rates do rise substantially before the CD matures. You'll be able to break the CD early and reinvest the money into higher-rate CDs. As we have long discussed, there are risks that the bank could increase the EWP before maturity. Early this month I reviewed this CD strategy with some popular internet banks and all-access credit unions.
Last year I reviewed some CD ladder changes and alternatives. Have you changed your CD ladders this year? Have you gone with longer or shorter terms? Is the bank's early withdrawal penalty an important factor for your CD ladders?