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“Back to the Future” Day - Looking Back at Rates 30 Years Ago


Back to the Future Part II

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.

One Improvement

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.

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decades   |     |   Comment #1
i remember in the early mid 80's under Reagan the government came out with All Savers certificcates .They paid like 12.5%  apy .tax free. Unfortunately then I was living in storage rooms and didn't have any money .
Anonymous   |     |   Comment #5
Think only $1,000 was tax free and $2,000 for those filing jointly. 
So depending on your tax rate during the 15 months would it
be much of a savings. 
Anonymous   |     |   Comment #7
I had a five year cd at that time which payed 13 percent but I had only 1 or 2 thousand in it.  My dad had a five year cd paying 17 percent
Greg (anonymous)   |     |   Comment #2
Thougtful, on-target essay, pretty much like everything that Ken writes.
Anonymous   |     |   Comment #3
LOL, yeah I hear ya, I was the same way, and said than I'd save and be ready next time,  Well its next time, and I've saved, but now its "back to the furure" for me lol
tj (anonymous)   |     |   Comment #4
take me back to the future, so i can buy 30 year bonds.....
DCGuy (anonymous)   |     |   Comment #12
The people who invested in the 30 year T-bonds back in 1985 when rates hovered around 12 to 14% are going to receive a rude surprise at maturity this year.  I did invest in some T-bills (6 month and 1 year), but did not want to extend the investment time for too long.  I was only earning about under $10 an hour back then, so did not have too much to invest.  Now, I am earning much more (more than 10x my annual salary back then) and have plenty of spare cash to invest, but the pickings are slim.  So if I had to choose between small salary and high interest rates and large salary and small interest rates, I would go for the latter.
Anonymous   |     |   Comment #6
Back in those days I bought thousands in long term "trip/trip" (AAA rated by both services, Moodys and S&P) muni bonds paying me circa 11% interest.  Prescience?  Genius?  I wish.

Truth is I had no advance clue whatsoever how good those bonds would be to me and how well they would work out over many, many years.  Had I known I would have dumped every cent I had into such bonds.  As it was I'm grateful for the ones I did buy, and I was very, very sad when those bonds finally matured.  11+% tax free is today only a dream.  I do expect such high rates to return some day . . . but almost surely not during my lifetime.
BluBaroness   |     |   Comment #8
Another Thank You to Ken + internet!
  I don't follow many blogs, but I read yours.
  I am a close to the vest widows & orphans saver & appreciate maxing my $ safely. Were I to depend on local banks/ credit unions/ s&ls my return would be much lower.
  Now I can cast a much wider net to cull offers across the US.
  Today I feel "I'm running as fast as I can to stay in the same place" (Alice in Wonderland) by having a few rewards checking accounts & CDs, but better slow & steady than the turmoil of stocks.
Anonymous   |     |   Comment #9
Folks, hindsight is always 20/20 vision. Anyone buy a house or car in the 80's at 13% interest?
Anonymous   |     |   Comment #10
I bought one, but managed to get a VHDA loan, which at that time was 7%, cheap by the standards of that time.
Anonymous   |     |   Comment #11
I bought one, April 80, but managed to get a VHDA loan, which at that time was 7%, cheap by the standards of that time.