NEW YORK (MainStreet) If you're old enough to remember when certificates of deposit paid double-digit returns, you probably won't live long enough to ever see it happen again.
Ever since the Fed's fateful decision to push its target under 0.25% in 2008, we've watched deposit interest rates tumble to depressing lows. Today, the country's largest bank, JP Morgan Chase (JPM), offers a two-year CD at just 0.25% for a $10,000 deposit, while financial powerhouse Bank of America (BAC) provides 0.10% for the same term. The national average rests at a mere 0.47% APY.
When will we see rates stabilize? Former Fed Chairman Ben Bernanke expressed he doesn't expect the Federal Funds rate to return to its long-term average of 4% within his lifetime, according to a Reuters. Bernanke is 60 years old.
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Once considered safe, simple tools for growing long-term wealth, the interest rates on today's CDs don't even keep pace with inflation -- and we shouldn't expect them to any time soon.
Half of Americans Wouldn't Open a CD for Less Than 3% APY
In a May 2014 poll by GOBankingRates, respondents were asked what interest rate they would need to earn in order to put their money in a two-year CD. More than half of those polled (51.3%) said they wouldn't bother with a CD unless they were guaranteed at least 3.01% APY.
I hate to break it to you, but anyone holding out for CD rates that high will be sorely disappointed.
Today's highest interest rates on certificate of deposit accounts tap out at about 2.00% APY for two-year terms. In fact, the best rate available today is 2.00% APY from the Institution for Savings, a mutual savings bank located in Newburyport, Mass. Online banks offer CD rates in the 2.25% to 2.30% range, but depositors must lock in their money for five years to achieve these returns.
When Will CD Rates Return to 'Normal?'
"The short answer is that CD rates will be begin rising when inflation does," said Matt Shibata, a principal and portfolio manager at Morling Financial Advisors.
Rates on deposit accounts, including CDs, are tied to a number of factors that must all align before we see a significant increase.
"Short-term U.S. Treasury bills offer yields that are tightly correlated with both the discount rate that the Federal Reserve sets, as well as with the overnight rates at which banks lend to each other," Shibata said, noting these rates are likely to stay close to zero for at least another year or two.
And while predicting what short-term CD rates will do is little more than a guessing game, Jonathan K. Duong, CFA, CFP, President and founder of Wealth Engineers, LLC, pointed to the June 2014 Federal Reserve Bank of Philadelphia's Livingston Survey as an indicator of how experts believe CD rates will change.
Most notably, respondents raised their estimates for the three-month T-bill rate by 20 basis points to 0.95% for December 2015. The forecast for the 10-year Treasury was simultaneously reduced from 3.88% to 3.75%.
"This indicates that forecasters predict short-term rates will move upward, while long-term rates will rise less than previously thought," explained Duong.
Still a Place for CDs
So if deposit rates aren't budging for years, should Americans even bother keeping their money in banks?
Yes, but not for the same reasons investors traditionally have.
We can no longer rely on CD accounts to propel us toward a comfortable retirement. We can, however, use them to protect against financial emergencies and act as a restricted savings account. Nobody's getting rich off today's CD rates, but honestly, who cares? One-third of U.S. workers have less than $1,000 saved, period.
CDs can be powerful tools in a time when an alarming number of Americans don't even have a basic savings fund, forcing depositors to keep savings socked away with the added benefits of FDIC insurance and interest that no mattress can compete with.
--Written by Casey Bond for MainStreet