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Why Are CD Rates So Low Given The Rise In Federal ?

Dasiuke
  |     |   1 posts since 2022

The Federal 1 year rate is currently at 1.05%. That will rise rapidly once the Fed raises its short term rate (the 1 month rate used by banks which borrow from the Fed) in March. They have already announced that there will be a rate hike but not the actual amounts. As of today, the prognosticators on Wall St. anticipate a full 0.5% increase. This will most directly affect the 1 year rate. The yield curve is already flattening, with the 5 year at 1.9% and the 10 year barely ahead at 2.0%. There is no state tax on income from Federal bonds. My question in light of the above is, why are CD rates still below the Fed rates when they are typically well above them in each duration category? Are banks simply waiting for the increase to be officially announced by the Fed?

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Saver5
  |     |   27 posts since 2015
If I owned a bank in which people were letting their certificates renew at abysmally low interest rates, I would not raise rates. Why pay more money for deposits when you don't have to? I would only raise rates if I were starting to lose deposits (to other banks, Treasury bonds, etc) because of my low rates.
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w00d00w
  |     |   360 posts since 2012
i'd recommend listening to the recent WSJ Your Money Briefing podcast episode titled "Why Interest on your savings probably won't go up anytime soon"

the bottom line is that many banks are too flush with cash at this time.

https://www.wsj.com/podcasts/your-money-matters/why-interest-on-your-savings-probably-wont-go-up-anytime-soon/3090d2de-6b8c-4d19-925e-686197a9eb32
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Choice
  |     |   937 posts since 2020
If the FIs stagnate on raising rates, investors will move money…a lot of money…to ibonds which will trigger Treasury Direct to curtain ibond purchases with (lower) cap on annual purchase amount or….
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GreenDream
  |     |   358 posts since 2019
Ibond's have a cap on how much one can "invest", and that cap is not in the "a lot of money" range. While it's possible to game the system to invest more (via trusts, businesses, etc) the majority of bank depositors are not very likely to go to such lengths. Heck the majority of bank depositors currently keep their money in large B&M banks offering 0.1% interest or less.
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Choice
  |     |   937 posts since 2020
Today’s WSJ “And that rate (7.12) is attracting droves of safety-conscious investors looking for a hedge against inflation, plus a few tax advantages….”  I should have used “droves.”
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GreenDream
  |     |   358 posts since 2019
Putting aside the lack of definition of what constitutes "a drove". There's a world of difference between "droves" of investors moving small amounts (10k or less) and investors each moving "a lot of money". A bank losing an investor's 10k (or even several investors at 10k each) isn't gonna move the needle as much as a bank having those same "droves" moving much larger amounts of money.

Bottom line, Ibonds aren't that big a threat to bank deposit balances due to their small cap. Nor are they much of a risk to the Treasury (even with "droves' suddenly taking notice of them) again due to their already small cap.

As nice as ibonds are, they're really small potatoes in the world of finance.
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Choice
  |     |   937 posts since 2020
See earlier Ken post…Up to $65k a year…what’s in your wallet
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GreenDream
  |     |   358 posts since 2019
See my earlier posting "While it's possible to game the system to invest more (via trusts, businesses, etc) the majority of bank depositors are not very likely to go to such lengths. "
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Choice
  |     |   937 posts since 2020
Right…they like the low CD rates as an alternative to ibonds
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GreenDream
  |     |   358 posts since 2019
It's not a matter of "liking" one over the other. The majority of bank depositors keep their money in B&M banks paying a fraction of what online banks pay. Do you honestly think such people are the type to go around creating trusts and businesses in order to game the ibond system. If so, there's this nice bridge in Brooklyn you might be interested in purchasing.....
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CuriousDave
  |     |   233 posts since 2018
It's possible that the low cap on annual purchases of I-Bonds may be raised substantially That has happened before, around 1999 - 2000, when the public made very large purchases. If banks are unmotivated to follow the Fed's rate increases because they are awash with money, the Fed can have the U.S. Treasury raise the maximum purchase significantly to reduce inflation by reducing monetary liquidity in the marketplace. https://www.treasurydirect.gov/indiv/research/history/histtime/histtime_sb.htm
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Choice
  |     |   937 posts since 2020
Dave, I was thinking more along the line…let the Fed do its thing but if TD is seemingly competing for rates/funds with FIs the latter will yell…our government is taking “our money.” Consequently under this scenario TD will restrict purchases, change redemption rules, etc.
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CuriousDave
  |     |   233 posts since 2018
When the cap was raised on I-Bonds to $30,000 in 2002, the banks cried foul then, and one by one they stopped processing savings bond purchases for the Treasury, for which they have never received any form of compensation and had been training their staff for the special handling that these bonds require. But the Treasury did not reduce the higher cap until 2008 so the public kept investing in savings bonds for some time, which drained a lot of excess money from circulation and brought inflation down. Currently very few banks handle these bonds at all, and the Federal Reserve, which sets the overall national policy, has an agenda which is very different from the commercial banking industry (keeping inflation in check and maintaining a high rate of employment), The current members of the Fed Reserve have no experience dealing with the kind of financial environment we have now, last seen 40 years ago. so it will be interesting to see whether and how well they can bring inflation down.
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milty
  |     |   1,689 posts since 2018
GreenDream, Couldn't agree more regarding your assessment of iBonds, considering the purchase limits. Although, over many years and numerous purchases, the iBond may prove to be a nice nestegg. (In the short term, return wise, one might do just as well or better chasing bonus awards.)
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Rickny
  |     |   1,298 posts since 2017
The Treasury can always change, modify or eliminate the I Bond program.
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Rickny
  |     |   1,298 posts since 2017
The I Bond rate also changes every 6 months. If the current wave of inflation is "temporary" the rate can go down. You can't redeem an I bond within the first year. If you cash it in before five years have passed, the penalty is three months' worth of interest which is less than most CDs.
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GreenDream
  |     |   358 posts since 2019
True, however the current rate is 7.12% and the inflation numbers we have in already (2/3rds of the total) alone put the next rate at 5+% (likely closer to 7% by the time the rest of the numbers are in), So that gives people looking at buy today a good idea that the rates will remain high (and currently much higher than any CD is offering even when you factor in the 3 month penalty) for at least the first year that they hold them if they buy before May.
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Rickny
  |     |   1,298 posts since 2017
Per Treasury "You can't redeem an I bond within the first year. If you cash it in before five years have passed, the penalty is three months' worth of interest".

Added benefits of I Bonds. No state income taxes I believe all states. Tax deferred until redemption.
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GreenDream
  |     |   358 posts since 2019
Yes, RickNY. But what's your point? That quote doesn't contradict anything I wrote seeing as
1) I pointed to the rates that people can expect for the first year (7.12% for the first 6 months and something greater than 5% for the second 6 months based on the inflation numbers the we already know), assuming they buy before May, so the lack of redemption of the first year isn't an issue, the rates for that first year beat the rates CDs are currently offering hands down. That quote doesn't change that.
2) I mentioned the 3 month penalty and I quote: "(and currently much higher than any CD is offering even when you factor in the 3 month penalty) " so your quote only reiterates that point.

So again, What exactly did I say (exact quote rather than a paraphrase would be preferred) that you think that quote makes a difference? And if the answer is nothing, then what was the point of making that quote in response to my post?
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Rickny
  |     |   1,298 posts since 2017
Just specifying the penalty of 3 months if you cash in before 5 years (You didn't mention the penalties duration) for clarification. The 1 year redemption restriction is just Treasuries requirement you mentioned
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