With interest rates remaining low in 2020 — and the Federal Market Open Committee (FOMC) projecting enduringly low rates into 2023 — it might be time to look at savings and investment vehicles in a new light.
Certificates of deposit (CDs) are often thought of as low-risk investments, provided they generate positive returns over a period of time. And those are two key elements — among others — to consider, especially in a low-rate environment: time and returns.
In general, if the CD rates you currently enjoy do not fluctuate, you at least are guaranteed a predictable stream of income. On the other hand, if you have a floating rate — or if inflation begins to put pressure on purchasing power — CD returns could functionally be minimal.
Banks and credit unions can offer competing interest rates to attract deposits. On the whole, though, these rates move in line with benchmark interest rates.
Should the federal funds rate — the typical industry standard for lenders — stay low for a long time, financial institutions will similarly offer lower interest rates on CDs, at least relative to high-rate environments. This means CDs with higher rates are more profitable to you.
If interest rates on CDs remain low at a given financial institution — as benchmarked against the federal funds rate — a number of things can happen:
That's why it's important to consider how long rates might remain low, because they likely won't stay that way across all financial institutions over any, say, 10-year period. And if economic conditions change, and other options like stocks or ETFs become more lucrative, it may not be easy or financially sensible to liquidate your CD to quickly jump into a new investment.
Laddering your CDs, as well as keeping other funds on hand for well-timed investments, is key to making the most of your current CDs.
CD rates are determined by a number of factors and are specific to each individual lender. Consider:
For more information on CDs, and to find one that's right for you, contact The Federal Savings Bank today.