Variable Rate Cds

GlassSteagall | Jul 17, 2023 | 24 posts since 2017

For someone who just wants to keep even with inflation, are variable rate CDs a good idea? I've seen a few offers for CDs paying a variable rate during the CD term - rate is tied to the federal funds rate, 3 or 6 month T bill rate. A search of DA doesn't bring up much, so I'm hoping anyone who has thought about this or has experience with one might comment? Thanks.

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Answers

MAKNYC | Jul 18, 2023 | 323 posts since 2015

Since your stated objective is to keep even with inflation, I don’t see why you would veer towards CD’s tied to Fed Funds or t-bills. While there is likely a relationship between them and actual inflation, there will also be periods when they diverge significantly. The FED has other motivations in adjusting rates despite what they publicly admit. Besides, with TIPs treasuries available (a 10 year auctions this week) with full liquidity I can’t see a basis for preferencing the type of product you mentioned with those benchmarks given your stated objective. And to be clear….investing in TIPs is by no means a no-brainer. I just think it gets you closer to where you said you want to be.

Ally6770 | Jul 17, 2023 | 4,292 posts since 2010

As inflation is going down I would get a CD now or after the fed meets this month for as long and as far out I could. Why would you want a CD that would go down in the interest rate the CD is paying as the inflation rate is going down? There are CD's that are now paying a high fixed rate for 3 to 6 months if that is the time span you seem to be interested in or am I misunderstanding your question?

w00d00w | Jul 19, 2023 | 360 posts since 2012

i don't have any experience buying indexed CDs, but it seems to me the best time to buy would be when the index rate is low and expected to rise, while the worst time would be when the rate is high and expected to fall. the future of interest rates is unknowable, but i think a best guess is necessary when deciding whether to invest in this sort of savings product. also important to consider as with any CD, the cost of early withdrawal. another consideration is that when the next big selloff in the stock market occurs, there would likely be a drop in short term Treasury bill yields with a flight to safety.

Ally6770 | Jul 19, 2023 | 4,292 posts since 2010

I purchased what we called in the 80's rising rate CD's at a Savings and Loan and they did pay off during the time we purchased them during the time inflation was going up.

txFish1 | Jul 19, 2023 | 476 posts since 2023

@Ally I also purchased some rising rate CD's during the 80's from Savings of America here in Texas and yes that was a very good time to own them

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