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Recognized Social Butterfly

I got sticker shock on bank CD rates

When inflation was 9.1%, 40 years ago, bank CD rates were almost as high. I have bank CDs maturing this week so I checked the CD interest rates of about 5 banks near me, online. To my shock, the CD rates were the same as before inflation . I bet the loan interest rates increased. The low CD rates are the equivalent of price gouging by the banks. Yet, the political parties and news media only accuse manufacturers of price gouging.

 

I plan to transfer all of my CD money to a savings account.  At least, then, the bank will have to worry about me quickly withdrawing that money.

 

When do you expect CD rates to catch up to inflation?

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Bronze Conversationalist

@aruzinsky I do not expect CD rates to catch up (match) current inflation. Generally speaking, CD rates correlate closer to Federal Funds rates rather than to inflation. The current Federal Funds rate is 2.25% to 2.5%. Brick and Mortar Banks generally need approximately a 2% spread to keep their doors open. So, for the short term, brick and mortar banks are not paying 9.1% interest. You can obtain inflation rates (9.1%) with I-Bonds (inflation savings bonds) which are savings bonds issued by the U.S.Treasury. You can find out more details at Treasury Direct.gov. If you are still interested in CDs, take a look at brokered CDs which are offered by brokers such as Fidelity, Schwab, etc. Brokered CDs trade just like other investment types (i.e., bonds, stocks, etc.). However, brokered CDs are FDIC insured. So, if you hold to maturity, you will receive your money back. If you trade them, you may receive a gain or a loss depending on market value at the time of the trade. I have seen 1 year to 5 year new issue brokered CDs paying approximately 3.0% to 3.5%. which is better than the brick and mortar bank CDs.  

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Recognized Social Butterfly

Thanks.  I will look into I-bonds and brokered CDs.  My problem is that all (>5) of the banks within walking distance of me are offering interest rates (~0.1%) that are lower than they offered 25 months ago (~0.3%).  That is price gouging and I don't know how they expect to get away with it without alienating customers in their community. 

 

I found a bank 20 miles away that is offering 2% for a 25 month CD.  If you use Google to try to find the best CD rates near a location, there is an infuriating amount of deliberate obfuscation.  The only reason that I found the 2% bank was that a friend recommended it.  It didn't show up on any online best rate list.  Google isn't your friend.

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Bronze Conversationalist

@aruzinsky Another approach is to ladder short term Treasury notes over 1 to 3 years. The yield curve is flat or somewhat inverted which means short term rates (1 to 3 years are greater than longer term rates (5 years or more). Treasuries are guaranteed by the full faith and credit of the U.S. Treasury (the best guarantee on Earth). Remember, CDs are only insured by the Federal Deposit Insurance Corporation (FDIC). You can buy treasuries at auction with no additional costs/fees. However, you will need to wait for those auctions. As an alternative, you may buy existing treasuries that trade daily. You will incur a small fee if using a discount broker (perhaps $25.00 per treasury note) unless you are buying a significant amount ($1 million). As an added incentive, you will not incur any State income tax on treasury interest. You will incur State income taxes on CD interest. If purchased in a tax differed account such as an IRA, income taxes are due when IRA funds are distributed. All in all, current treasury notes will pay about 1% more than CDs and you will enjoy no State income taxes on treasury interest. So, for $10,000, you will earn about $100 more; and ,for $100,000, you will earn about $1,000 more. It is linear. Not bad for moving money from your right pocket to your left pocket. https://ycharts.com/indicators/reports/daily_treasury_yield_curve_rates

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Gold Conversationalist

No idea about when those rates may catch up.

I checked bankrate.com for current CD rates. I was really surprised to see the first listed rates for 1 year term were painfully low, around 0.01%. I don't know what was up with that because when I clicked "show more" there were banks with 1 year rates over 2% (around 2.3%). And spot checking my own bank, Capital One 360, also 2.3% for 1 year. Not great but nothing to sneeze at these days. Longer terms will yield higher rates.

 

Good luck with the $$$

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Honored Social Butterfly


@aruzinsky wrote:

To my shock, the CD rates were the same as before inflation. 

 

Yet, the political parties and news media only accuse manufacturers of price gouging.

 


What are you implying by the excerpts of your comments above?

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