Tips for savers, as another Fed rate cut looms

Savers have gotten a raw deal over the last year as the Federal Reserve has slashed short-term interest rates, dragging certificate of deposit yields down.

But here’s some good news: Even as the Fed gets ready to cut its benchmark rate again this week, you still have time to lock in CD yields. Many banks haven’t been moving very fast recently, if at all, to reduce what they pay depositors.

There’s a logical reason for that: It’s still cheaper for banks to attract consumer deposits than to get funding from other sources.

"Consumers are benefiting from the fact that banks are still very hungry for deposits," said Greg McBride, senior analyst at Bankrate Inc. in North Palm Beach, Fla.

A few numbers tell the story: The last Fed rate cut was on Oct. 8, when the Fed reduced its key rate to 1.5% from 2% as part of a coordinated move with other major world central banks to ease the global credit crisis.

But since then, the average national yield on one-year CDs has slipped just 0.02 of a point, to 2.61% from 2.63%, according to rate tracker Informa Research Services in Calabasas.

And some banks are paying well above the average yields, as usual. Bankrate.com on Monday showed almost 20 banks offering yields of 4% of more on a one-year CD.

Another rate-shopping site to check out: money-rates.com.

"There are still some good rates to get out there," said Ray Montague, manager of deposit research at Informa.

By contrast, if you’ve got cash sitting in a money market mutual fund or other short-term account, your yield is vulnerable if the Fed cuts again this week, which seems a virtual certainty. Wall Street’s consensus forecast is for the Fed to drop its rate by another half-percentage point, to 1%, after policymakers’ two-day meeting concludes Wednesday. (There’s also a chance they’ll make the announcement Tuesday.)

The average seven-day simple yield on taxable money market mutual funds was 1.45% last week, according to iMoneyNet Inc. That was down from 1.62% a week before the Fed’s rate cut on Oct. 8.

The bottom line: This is a good time to lock up at least some of your cash in federally insured CDs for the next six months to one year, if you’re sure you won’t need to tap that money in the interim. If you belong to a credit union, be sure to check its CD yields as well.

I know no one’s going to get rich on a 4% CD. Still, that yield is more than twice what many money funds are paying.

See this earlier post for some other CD shopping tips.

Comments

[peartree]

Hate to be a worrywart, but locking up money in bank CDs, even FDIC-insured ones, is not necessarily a safe bet right now with possible bank holidays looming.

Mr. Petruno, Tom--of course nobody is going to get rich at 4 percent. But that's hardly the point right now for folks who aren't sophisticated self-directed investors or can't afford savvy contrarian advisers.

The point is preservation and liquidity of capital necessary to get through income loss, whether through the loss of a job or small business, coinciding with massive bank failure.

There will, or should be, plenty of time to grow savings later. Right now the focus has to be on survival, which includes keeping cash at home or in a safe.

McBride says banks are "still very hungry" for deposits? They're desperate for deposits! And the reasons behind that desperation don't bode well for banks, even for BofAmerica, and the other big dogs.

Why not pass this storm in Treasury money market funds, and then worry about growing savings later?

At least give a hearing to those now uncertain about CD safety.

[Bill]

Jerked off again! Most banks treat you as some kind of cash cow, with grudging service, bogus fees, and a lot of hassle when you ask to get your funds out of their clutches. Those of us who like to save money for that rainy day get paid squat for interest, and every penny is reported the IRS on form 1098 and you must pay tax on it. The fact that few people here in USA save money is because there is no reason to do so.

[Bob Meade]

Our government sold the taxpayers down the river when they REWARDED the crooks who got us into this mess.

WHY did we give them 700 billion dollars for screwing up? They are BANKERS for God's sake. They are SUPPOSED to be well educated enough to know how to manage their/our money. The regulators and analysts were playing along with them because they were getting kickbacks.

Another question: Why are we giving money to banks so they can BUY other banks?

What criteria is being used to determine who deserves this money and who doesn't?

Why are the favored banks refusing to loan money like this (criminal) bailout was intended to do? That is not what the bailout was supposed to be for.

Paulson, Bernake and Bair have no good answers. They have proven they are useless in stopping this mess. Too little, too late. They committed financial treason by rewarding the crooks instead of conducting a mass investigation into this Ponzi scheme and putting people in jail.

Its pretty obvious what is happening. The banks are taking over this country and one day, in the near future, the taxpayers are going to wake up to a fascist state, thanks to the criminals in the White house who sanctioned this.

Rise up and vote these criminals out of office while you still can before they finish wiping their behinds with what is left of our constitution.

peartree is right. Get your money out of the banks and stash it at home in a safe (or safe place) until this crap blows over. Especially since we don't know what shoe will be next to drop and no one can be sure there won't be a banking holiday that repeats the depression.

[Ron]

"Savers have gotten a raw deal over the last year". try the LAST TEN YEARS!

[KT]

Isn't under the mattress still a better option? The real interest rate has got to be close to zero or even negative.

[Todd Nelson]

Tom,

I'm pleased to see mention of credit union rates and I encourage you to do even more to educate readers about the differences between for-profit banks and not-for-profit credit unions, which are member-owned and not driven by stockholders. At credit unions, any profits are given back to members in the form of lower loan rates, higher savings yields, and superior service aimed at meeting the unique needs of members.

Thank you for continuing to provide good information for anyone trying to keep his or her head above water in these turbulent times.

Todd Nelson
VP, Marketing & Communications
AFTRA-SAG Federal Credit Union
www.aftrasagfcu.org

[TImothy Colman]

What about Iceland? NYT says they are offering 18% interest right now.

What are risks to investing in Iceland for savings?

Too risky?

[peartree]

Timothy Colman: Please say you're joking about the Icelandic krona.

But if you're not, you are far from alone in wondering about it.

Foreign currency (FX) trading is for the pros and/or seasoned self-directed investors.

(That said, I did dabble/trade in a Swiss Franc ETF [exchange traded fund] earlier this year--got greedy, didn't sell high, and then sold just in time to break even. But I had almost no idea of what I was doing.)

FX is about much more than interest rates--if it were that simple, everyone would be in the Icelandic krona, right?

Super-high interest rates are a sign of economic distress. (As are super-low ones, for that matter.)

[martscan]

Anyone advocating keeping their savings in a safe or 'under the mattress', obviously, doesn't need a king size bed.

Anything covered by the FDIC is good regardless if the bank goes BK.

If you might need your dough within a year, buy a brokered CD from your stock broker.

Buy Treasury Bills and Notes...and if you don't have any solutions for this world wide crisis...shut up.

[peartree]

My mother worked for the president of the National Realtors Association in Washington, D.C.

He told her that his family fortune had been made during the Great Depression when his grandmother took money "out of the mattress" and bought real estate.

He wasn't a nice guy, but there was no reason for him to lie.

Nobody knows what is going to happen; nobody has any solutions.
Only best thoughts.

IF there is massive bank failure, bank runs and bank holidays, yes, you will probably, eventually, get your FDIC-ensured CD or other monies. But you don't know what it will be worth by the time you get it.

IMHO, anyone who doesn't have a fair amount of cash at home, not to mention stores of canned food, is plain silly. Many of my contrarian investor friends, who lost very little or no money (some are up, in fact) in the recent stock meltdown, have taken such precautions. They've been right so far, and I see no reason to doubt them now. An Argentina style melt-down is a distinct possibility.

Treat yourself to a visit at www.iTulip.com and see what's happening. Named by BusinessWeek as one of the seven best sites for finance in 2006. Its founder, Eric Janszen, tried to warn people about both the tech stock crash and end of the housing bubble. Swim in the knowledge there, the good manners (no one EVER writes "shut up") and learn. (Many MSM media reporters lurk there and contact Eric to pick his brain. And he's such a nice guy, he actually helps them. Because he cares about people.)

[peartree@post.harvard.edu]

"Buy a brokered CD from your stock broker," advises Martscan.

Whaaa? Is that what brokers are doing these days?

If it's a CD you must have, visit bankdeals.blogspot.com and buy it yourself.

I was in a BofA branch the other day inquiring about CD rates, and the handsome Brit manager with the plummy accent and cleft chin didn't tell me about the online-only rates--about twice what he was pushing.

And yes, if you buy an on-line BofA CD, they promise to let you manage it through your local branch.

But I wouldn't trust an organization that does business like that--hiding the best rates. Would you?

[martscan]

Like the snapping turtle that bit the frog he was taxiing across the pond, its my nature to respond.

FDIC covered deposits of a failed bank will most certainly be worth more than a like amount of cash kept in a cookie jar..or a mattress. Cash, left idle, is a depreciating asset.

Anyone mentioning 'survival' in connection with the financial crisis and connotations of storing water and 'canned goods' is, IMHO, nuts. These nutcases usually follow the canned food admonishments with descriptions of favored automatic rifles. Tattoos are discretionary.

I have advocated buying Treasury Bills and Notes, I have no idea what 'Treasury money market funds' are. By 'Treasury', I presume they are government guaranteed instruments of some kind, in which case I'd prefer a high rate CD covered by the same government via the FDIC. Everyone knows by now that the "MM" buck was broken. As to buying a CD from your broker, I qualified this for those who might need their money before maturation of their CD, most secondary market CDs don't carry an early redemption interest penalty...but may not be FDIC protected...ask.

As to a bricks and mortar bank manager pushing for a CD sale and not mentioning online rates, I wouldn't either. He's as worried about his financial health as the inquirer...and, in this day and age, is it not a given that most online purchases are advantageous vis-a-vis a physical location? I think there are few if any, savvy contrarian or otherwise, advisers who would not think knowing this would be akin to 'see Spot run.'

As to manners, I consider mine impeccable..when warranted, however, when 'jerk-off' is standard fare here, 'shut up' is hardly more offensive than 'please refrain from making idiotic statements.'

[peartree]

"I have no idea what 'Treasury money market funds' are," writes Martscan.

Here is an an example of a liquid Treasury Money Market Fund that can toggle money, at no charge, I was told, to and from a bank checking account:

Vanguard Treasury Money Market Fund
ticker symbol: VMPXX.

"Everyone knows by now that the "MM" buck was broken," Martscan writes. Yes, but this was in a MM holding commercial paper, I believe.

"...is it not a given that most online purchases are advantageous vis-a-vis a physical location?" Martscan writes. I would argue that many of those most in need of some interest on their cash savings do not know this.

I would also argue that the for-profit banking system--newly infused with taxpayer dollars that could pay for Medicare and Social Security--now have an obligation to disclose all information to owner-consumers. IMHO, the BofA bank manager no longer has the right to worry about "his own financial health," as Martscan writes. Furthermore, based on anecdotal evidence, I have reason to believe that BofA branch managers may selectively reveal higher CD rates to favored customers.

I do not pretend to know everything. I am only Dummy-plus--know enough to be dangerous to myself and my money. But I will never tell anyone to "shut up" or suggest they make "idiotic" statements, and I would also be suspect of the intelligence and motives of anyone who uses such language.

That said, there is nothing more deadly than formal charm.

Oh well.

[martscan]

The 'breaking of the buck', unawares to me, precipitated an emergency, temporary federal guarantee of MM funds by Bush on Sept. 19. Prior to that date, they were not, in the context of "Treasury", guaranteed by the U.S. government.

I strongly suspect that anyone who is computer literate and has a keen interest in the cost of, and returns on, money, to the extent of 100ths of a percent, has been quite familiar with the cost differentials between online purchases and those at the mall. However, far be it for me to risk being called a boor by accusing someone of lying. That would be, oh, so gauche. So I shan't do it.

What Medicare and FICA, taxpayer funded entities, have to do with the credit crisis...other than some remote connection with the uses of tax receipts, I have no idea. Were I to think of a more applicably stark contrast to make a rather obtuse point, I think I would select the cost of an illegal war...particularly when juxtaposed with a solvent, moral Social Security.

As to a "for-profit banking system", it would seem to me that a recipient bank of government largess has a responsibility to be as profitable as possible, as soon as possible. Else, how are we, taxpayers, to be paid back? Of course, strict socialists wouldn't want to be paid back but would prefer holding a larger, if not all, equity stake in the bank. Regarding managers whose income is dependent on profits derived from activities under his/her purview, again, it seems to me, given the increased scrutiny wrought by the conditions which now demand accountability...by 'big brother' no less, it is incumbent on managers to maximize margins. And, to state that a manager "no longer has the right to worry about 'his own financial health'...is an outright abomination that smacks of fascism. A mere inkling of 'thought control' conjures images of Nazi Waffen SS officers replacing slumbering bank security guards. I have reason to believe that when citizens begin to expropriate other citizens' Constitutional rights, there is danger afoot in the country...from wackos.

Self deprecation is normally an admirable quality, save when it is used as a thinly disguised, left-handed compliment to one's self...then it is clear cut evidence of egoism, if not flat out narcissism.

No one who knows me has any 'suspicions' regarding either my intelligence or ability to articulate my disdain for anyone, or any stupid premise, in the most foul language imaginable. Pity I can't exercise my talent for utilizing profanity here, where it's needed.