Money in the bank? Advice for savers as Fed cuts rates

The Federal Reserve’s latest interest-rate cut is the anti-bailout for savers: They’re going to pay to help the financial system, by giving up interest earnings.

The Fed on Wednesday sliced its benchmark short-term rate to 1.5% from 2%, in a coordinated cut with other major world central banks.

Normally, Fed rate cuts push down other short-term interest rates, including on bank certificates of deposit and on the corporate and government IOUs that money market mutual funds buy.

But with the financial system turned on its head by the credit crunch, these aren’t normal times. So although many analysts expect consumer savings rates to drop, it isn’t clear how quickly that might happen, or how broad a decline there may be.

"Bankers are still hungry for consumer deposits," notes Greg McBride, senior analyst at Bankrate Inc. in North Palm Beach, Fla. That’s because that money is a stable source of funding in a highly unstable credit market.

But any decline in rates would make paltry yields even more so. The average national yield on one-year CDs was 2.63% as of Tuesday, according to rate tracker Informa Research Services of Calabasas. That yield was actually up from 2.4% six months ago, despite the Fed’s quarter-point rate cut on April 30. And it's still better than the 1.24% yield on a one-year Treasury bill.

What to do? Here are some basic strategies that should benefit bank savers:

--- Given what the credit crunch is doing to the economy, it’s reasonable to assume that the Fed will keep pushing interest rates lower. That means "this is as good a time as any to lock in yields," says Ray Montague, manager of deposit research at Informa.

To hedge your bets, the smartest way to go may be to "ladder" CD maturities: If possible, split your money among several maturities out to a maximum of 12 or 15 months.

--- Look for CD specials rather than traditional maturities. Many banks pay low rates on so-called core CDs, such as six-month issues, because customers tend to just keep rolling them over without asking questions.

To attract new money, banks often advertise specials, Montague notes. For example, Wells Fargo & Co.’s website on Wednesday was offering just 1.5% on a standard six-month CD with a minimum deposit of $10,000. But for a seven-month CD of at least $5,000 the yield offered was 3.4%.

Just be sure to read the fine print.

--- Maybe more than ever, be prepared to shop around. If you want to earn the highest yields, you’ll have to decide whether you’re comfortable putting your money in an institution you don’t know much about -- other than that it has federal deposit insurance coverage. You can look on Bankrate.com for a sampling of yields.

If that’s too much work, and you just want peace of mind, you can go with a high-yielding bank already rescued by a larger institution or by the government itself. Countrywide Bank, now part of Bank of America Corp., on its website Wednesday was offering a one-year CD at 3.90% for a minimum balance of $10,000. IndyMac Federal Bank, which is under Federal Deposit Insurance Corp. control, was offering an online special of 3.95% on a one-year CD for a minimum of $5,000.

--- Given the economic uncertainties, don’t underestimate how much you may need to keep in regular savings or money market deposit accounts, so that you can get at it quickly (as opposed to in CDs with early-withdrawal penalties).

Don’t sacrifice too much liquidity in search of yield, says McBride. "Having a rainy-day fund is key now."

Comments

[Rachel Bruckmeyer]

You can find 4.00% savings accounts (money-rates.com) to put your money in and be safe. Enough of these losses in the stock market. The insiders probably all got rich already.

[PR]

My credit union is offering 5.00% APY on a 3-year CD. It's looks great, but I'm not biting, since the Fed will have to reverse course before next summer and raise rates to fight inflation. My Roth IRA managed to grow last month despite turmoil in global equities and money markets, so I'm dumping my extra cash in there for now.

[Bill]

I got 4% at Wachovia last month and happy to have it. Wells gave me somewhat less, if I opened a checking account with a free box of checks. It looks like Wells will merge with Wachovia. Laddering your CD's is standard practice, as is going to the bank at maturity and taking the promotional or retention rate. Never let a CD renew automatically, always a bad deal for you. I have money at Wells and a Visa card, but rather use Discover. Why, its a different bank and Wells cannot seize funds from my accounts without permission because of some credit card fraud. When they send the bill, I review every line item before writing the check. I write the check, I'm in control of MY money. Home loan is with WaMu, there are no funds there, either. When the statement arrives, mark the calendar one week early and send in the check on time.