CD Deals Summary
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Fed Meeting Preview and Deposit Rate Forecast - March 15, 2023
Silicon Valley Bank Is Shut Down - Second Largest Bank Failure in HistoryOnline Bank CD Rates Falling to All-Time Lows
The Fed’s zero interest rate policy (ZIRP) is just over two months old, and already we’re seeing online banks cutting their CD rates to all-time lows. This doesn’t bode well for future deposit rates, especially if the economy takes a long time to recover from the COVID-19 pandemic. I’ve reviewed the rate history of three online banks that have recently cut their 5-year CD rates to all-time lows. The disturbing thing to note is that the previous lows didn’t occur until several years into the last ZIRP period, which lasted from December 2008 to December 2015.
Last week I reviewed several online banks that have cut their 5-year CD rates so low that they are now lower than their savings account rates.
Ally Bank 5-Year High Yield CD
On Friday, Ally Bank’s 5-year High Yield CD rate fell to an all-time low of 1.40% APY. The 5-year APY had been at 2.15% through January and February. Ally Bank started to cut soon after the first Fed emergency meeting on March 3rd. On March 6th, Ally Bank lowered the 5-year rate to 1.75% APY. The rate continued to fall. On May 12th, the 5-year rate had fallen to 1.50% APY, which tied its all-time low that occurred in 2013.
I annotated the DA rate history chart of Ally Bank’s 5-year High Yield CD so you could clearly see the rate milestones.
DA’s rate history chart for Ally Bank began in October 2009, which was almost a year after the Fed started its last ZIRP period. One thing to note is that rates remained relatively high well into this ZIRP period. The 5-year rate was 3.40% APY in October 2009. The rate didn’t fall below 2.00% until October 2011. Before the Fed began cutting rates in 2019, Ally Bank’s 5-year rate reached a high of only 3.10% APY.
Synchrony Bank 5-Year CD
Synchrony Bank also lowered its 5-year CD rate on Friday from 1.50% to 1.40% APY, and like Ally, Synchrony Bank began slashing the rate soon after the first Fed emergency meeting. Before this meeting, the rate had been holding at 2.15% APY. Also like Ally, Synchrony Bank’s 5-year rate reached a high of 3.10% in 2018. The rate started to fall in May 2019.
I annotated the DA rate history chart of Synchrony Bank’s 5-year CD so you could clearly see the rate milestones.
DA’s rate history chart for Synchrony Bank didn’t begin until January 2013. The reason this didn’t begin in 2009 is that Synchrony Bank used to be MetLife Bank. In January 2013, GE Capital Retail Bank acquired MetLife’s online deposits business. GE Capital Retail Bank didn’t last long. In June 2014, the Bank changed its name to Synchrony. Since it was only a name change, DA retained the product and rate history.
When DA’s rate history for Synchrony Bank began in January 2013, the 5-year CD rate was at its low of 1.50% APY. The rate slowly increased until it plateaued at 2.30% in April 2014. It had a slight fall in November 2014 to 2.25%, and then it held steady until February 2016. That was the year after the first Fed rate hike. The global economic turmoil in early 2016 ended hopes of higher rates and caused CD rates to decline. By August 2016, the 5-year CD rate had fallen to 1.85%. Rates finally began to rise in 2017, and they kept rising until late 2018. Synchrony Bank’s 5-year CD reached its peak of 3.10% APY in October 2018, and this rate held until May 29, 2019.
First Internet Bank 5-year CD
First Internet Bank never became as popular as Ally or Synchrony, but it has a long history as an online-only bank, which began in 1999. DA’s rate history for First Internet Bank began in November 2009. At that time, the 5-year CD was at 3.30% APY. The rate slowly fell until it reached its bottom of 1.60% APY in June 2012. From there the rate slowly increased until February 2016 when it reached 2.27% APY. The global economic turmoil of 2016 also had its effect on First Internet Bank. The 5-year rate fell to 1.92% APY by August 2016. The rate didn’t start rising again until 2017.
First Internet Bank has a history of offering higher CD rates than the popular online banks. Its 5-year CD recent peak of 3.40% APY was reached in December 2018. The rate began falling in January 2019.
The 5-year CD all-time low was actually reached on March 16, 2020. This was a day after the emergency Fed meeting which lowered the fed funds rate to its zero bound. First Internet Bank’s 5-year CD rate fell from 2.02% to 1.51% APY. Like a few other online banks, First Internet Bank decided to partially reverse large March rate cuts. On March 26, the Bank increased its CD rates. The 5-year rate increased 20 bps to 1.71% APY. The rate increased again on April 21, rising to 1.77% APY. Those rate hikes didn’t last long. The rate began to fall in May, and it’s now close to its March low. Last week, the Bank’s 5-year CD rate fell to 1.57% APY.
I annotated the DA rate history chart of First Internet Bank’s 5-year CD so you could clearly see the rate milestones.
Future of CD Rates?
As you can see in all of the above charts, it took several years after the start of ZIRP in December 2008 before online 5-year CD rates reached their bottoms. Unfortunately, these new CD rate bottoms have been reached in less than three months after the return of ZIRP. As I mentioned at the start, this doesn’t bode well for future deposit rates, especially if the economy takes a long time to recover from the COVID-19 pandemic. The Fed will be in no rush to hike the fed funds rate. However, CD rates may rise before the Fed hikes rates if there are signs of a strong economic recovery. Until we see those signs, I’m afraid we shouldn’t expect any significant CD rate gains. The best we can hope for will be an occasional CD special. Keep an eye out for these specials in the DA 5-year CD rate table and in the bi-weekly CD rates survey.
Stuck in USAlliance's 3.0% 1 yr deal from last year 'til 6/3;;
....please tell Advancial to keep those rates past 5/31...PLEASE !!!!!
EDIT Sorry , must be funded at opening.
You remind of GM Bk during the Big R . My long term warranty may have become worthless (at the end it wasn’t) but I did look to see what private insurance covered the GM warranty as backup...never needed it but it was there!
"So by not taking RMD this year I'll continue getting 4% on that 31K until I'm dead, at this time when CD rates are a lot lower than 4% and likely to stay low for years to come. There's no requirement to take a makeup RMD next year in addition to the regular RMD; that 31K will stay in my account and will have the effect of extending the number of years I keep getting payouts before the principal is exhausted, or increasing the payout to beneficiaries when I die."
RMD is calculated as a percentage of the funds remaining in your retirement plan based on your life expectancy at the end of each year. So if you don't take the $31k this year, each subsequent year you will be forced to withdraw a portion of that $31k. The full $31k will only remain in your account until you start drawing it down next year, not for the life of your remaining balance in the fund.
The caveat is this. Whether or not you come out ahead is not yet known since we cannot predict what future tax rates will be or how long you will live. With the massive government redistributions going on right now, someone is going to have to pay for it all. And it's "rich" people like you that are in the crosshairs for higher taxes to do that.
It remains to be seen whether you will be better off taking the $31k now and paying what may end up being the lowest tax rates we will ever see again on it, or taking it out over the course of coming years at higher tax rates. It's an analysis that is more complex than it seems and involves variables that we cannot know in advance.
Given that, you may well be better off taking out some or all of your tax deferred funds now rather than wait for the taxes to rise only too pay more taxes on your withdrawals later. And for most people, the older they get the more sensible this becomes. The value of the tax deferral (theoretically depending on how it is invested) becomes incrementally less as you age because you have fewer years for it to accumulate tax deferred.
In the case of retirement accounts that applies to both the nature of the investments, and the strategy for distribution. So, in essence it means take some of the money out now and leave some of it in. Based on that philosophy, I'd be tempted to take an RMD distribution this year even though it is not required because its not clear whether you will come out ahead or not by doing that.
There are always exceptions depending on individual circumstances. If, for example, you expect your income to be substantially lower in coming years, it might make sense to forgo the distribution this year. There is no one size fits all.
But the most important takeaway is that there is no "right" answer to decisions like this since it involves factors that you cannot currently value. All you can do is guess (or diversify).
For example, my Navy Federal 5-yr after-tax CD will throw off 2.96% each month to my NFCU checking account for the next 4 1/2 years. My StateFarmBank and PenFed IRA CDs (yielding roughly 2.3% on average) will run until 2024. My INOVA IRA CD won't mature until 2025, and it's yielding 3.5%. Yields on IRA CDs maturing in 2021 (at Patelco and Alliant) have fallen, but not as much as I would have suspected they might. Credit unions seem more eager to bid for our business than banks.
Meanwhile, as others have noted, balanced portfolios of stocks and bonds have certainly recovered from the panic low of March 23. The standard advice of Jack Bogle to "stay the course" has proved true once again.
Best regards and stay safe,
Bozo