Today is "Back to the Future" Day. In the movie "Back to the Future Part II," Michael J. Fox’s character, Marty McFly, travels forward in time to October 21, 2015, to save his children, yet to be born in "Back to the Future’s" 1985. Many TV and media stories are having fun with this day comparing predictions made in the 1989 film to what actually exists today. I thought it would be interesting to take a look at how interest rates have changed in 30 years. In 1985 would you have expected rates in 2015 to be as low as they are?
The 1980s started out with very high interest rates as the Fed was battling double-digit inflation. The high rates did bring down inflation. In October 1985, the CPI-U was down to 3.1%. Now the Fed is worried about inflation that’s too low. Due to the recent decline in gas prices, the CPI-U is now at 0%. There has been essentially no change in prices over the last 12 months (as measured by the CPI-U).
As you might expect, the Federal funds rate is much lower today than it was in 1985. On October 21, 1985, the target Federal funds rate was 8.0%. Today, it’s a range between 0% and 0.25%. It has been this way since December 16, 2008.
It’s difficult to compare deposit rates between 1985 and 2015 since there’s not much historical deposit rate data from 1985. The Federal Reserve Bank of St. Louis has historical data on brokered CD rates on the secondary market. In October 21, 1985, the 6-month CD rate was 8%, coincidentally the same as the target Federal funds rate. This CD historical data was discontinued in June 2013. At that time, the 6-month CD rate was 0.27%. With no significant rate changes in the last two years, it’s likely this secondary market 6-month CD rate would be very close to 0.27%. Of course, you can get much higher rates today at certain banks and credit unions. For example, MySavingsDirect is currently offering a 1.05% APY 6-month CD that’s available online (see other top rates using our 6-month CD rate table). The average 6-month CD rate for all banks is much closer to 0.27%.
Is Today Better for Savers?
I’ve heard some people say that it’s better for savers now than back in the 1980s since inflation is so much lower. If you take into account taxes and inflation, the net earnings from deposit accounts are higher today than they were in the 1980s. In my opinion, there are complications to this comparison that make it worse today. For example, in the 1980s, inflation was declining. Savers who locked into a long-term CD or bond in the early 80s did very well. Also, the real inflation that’s felt by an individual varies considerably with the official inflation numbers. For example, those who don’t drive much are probably experiencing inflation much higher than the official inflation number. For these people, the low gas prices don’t offset the higher food and health care costs.
Looking back at the predictions made in the Back to the Future movie, many people are disappointed. There are no hoverboards, flying cars or personal fusion reactors. If savers had made predictions in 1985 about deposit rates in 30 years, I think most would have predicted much higher rates. Savers definitely have a reason to be disappointed, but there’s a bright spot in the changes from 1985. One big technology improvement over the last 30 years is the internet. It’s much easier shopping for higher deposit rates thanks to internet banks and websites like DepositAccounts.com. Unlike 1985, you are no longer limited to your local area when searching for the best rates.