As savers face more rate deflation, I-bonds have appeal

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The Federal Reserve meets this week to dish out another break to borrowers -- and more misery to savers.

Fed policymakers on Wednesday are almost certain to trim their benchmark short-term rate to 2% from the current 2.25% (announcement expected Wednesday at 11:15 a.m. PDT). But with this cut Chairman Bernanke & Co. are expected to go on hold for awhile, as I explain in this column. They’re still worried about the financial system and the economy, but they may be more worried at the moment about inflation pressures.

Another Fed cut will only mean deflation for savers, who have seen their interest earnings wither since the central bank began hacking its key rate late last summer. The average seven-day yield on money market mutual funds now is 2.08%, according to ImoneyNet Inc. With another Fed cut it’ll be under 2% soon.

One place to look for higher returns on a portion of your long-term savings: inflation-indexed U.S. Savings bonds, known as I-bonds. And Wednesday is the last day to buy them before the Treasury’s semi-annual rate adjustment.

I-bonds earn a combination of a fixed rate, which holds steady for the 30-year life of the bond, and the inflation rate as measured by the Consumer Price Index. The inflation component is adjusted each May 1 and Nov. 1. The current annualized yield on the bonds is 4.28%.

Why would you want to buy I-bonds before Wednesday? As this Bankrate.com article explains, the Treasury may opt to cut the fixed rate on I-bonds issued starting May 1, from the current 1.2%. Any cut would make the bonds less attractive for the long run. For information on buying I-bonds directly from the Treasury, go here. (Many banks and credit unions also sell the bonds.) For a long-term history of I-bond rates and other specifics on the bonds, go here.

Posted April 27, 2008