Savers can still get good rates
What will the Federal Reserve’s interest rate reduction Tuesday mean for people who keep their savings in bank accounts? There’s a good chance the answer to that question is very little.
Typically, rates offered on savings instruments react quickly to Fed cuts, falling faster and further than rates on loans. But since the central bank started lowering its benchmark interest rate Sept. 18, rates on savings have been “drifting like a feather rather than falling like a rock,” said Greg McBride, a financial analyst at BankRate.com.
The reason: Bankers need your money to fund new loans.
That’s a switch from recent years, when it was easy for banks to sell many loans to Wall Street, which would package them into securities for sale to investors. Banks could use the cash they received to make more loans, instead of keeping their money tied up in their loan portfolios.
But since the sub-prime mortgage crisis hit in earnest last summer, banks have found it much more difficult to sell loans, especially mortgages, and therefore have reverted to the “It’s a Wonderful Life” scenario, in which they need deposits to lend.
That creates opportunity for savers.
“If you want to attract money, you pay competitive yields to get cash coming in the door so you can keep making loans,” said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, N.J., financial publishing company. “The financial market collapse is penalizing borrowers, but it’s helping savers.”
In its current round of rate cuts begun three months ago, the Fed has shaved one percentage point off its key rate. That has helped pull down yields on Treasury bills, which like bank certificates of deposit are popular with individual savers. The six-month T-bill yield, for example, has dropped to 3.17% from 4.88% in early August.
But the effect on bank depositors has been far more muted.
The average yield on six-month bank CDs nationwide has declined a mere 0.20 of a point since early August, to 3.66% now from 3.86% then, according to rate tracker Informa Research Services in Calabasas.
That means savers can earn more on six-month CDs at many banks than on Treasury bills of the same term, although Treasury interest is exempt from state income tax.
Similarly, the average yield on two-year CDs, 3.96% on Tuesday, is down from 4.28% in early August. In that same period the two-year Treasury note yield has dived to 2.92% from 4.42%.
Some banks are paying rates well above the national averages -- which is why McBride and other analysts say it’s important to shop around.
Indeed, Countrywide Bank, a unit of beleaguered Calabasas-based mortgage lender Countrywide Financial Corp., on Tuesday was paying 5.35% to people willing to lock up at least $10,000 in a six-month CD. On a three-month CD, Countrywide was offering 5.45%.
Although some banks are paying more on three-month CDs than on longer-term deposits, many experts suggest that savers lock up some cash now in one-year CDs. That’s because the Fed is likely to implement more rate cuts, which eventually will trim bank savings rates, said Frank Trotter, president of EverBank Direct, a Jacksonville, Fla.-based lender.
“Our view is that while the Fed may not hurry to make another rate cut,” he said, “there may be another one or two in the cards.”
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