As Fed Raises Interest Rates, CD Rates Remain in the Dumpster

A decade ago, just before the last recession kicked in, savers were earning an average of nearly 4 percent on one-year CDs.

That sounds like a fortune compared with the near-zero returns that depositors have endured in recent years.

With two quarter-point interest rate hikes by the Federal Reserve in recent months and economists generally expecting two more this year, the outlook for higher deposit rates is finally improving. But so far, savers have seen little relief.

“Most banks are doing everything they can to avoid raising deposit rates,” said Greg McBride, senior financial analyst at interest rate tracker Bankrate.com, based in North Palm Beach, Fla.

Banks’ profit margins have been squeezed for so long, “It’s now an opportunity to get some breathing room,” he said. “That means passing along higher rates to borrowers but not to savers.”

Yields on certificates of deposit have barely budged in the wake of the Fed’s rate hikes. Returns on six-month CDs averaged 0.21 percent last week, just a smidgen better than the 0.17 percent average a year earlier, according to Bankrate.com.

At the same time, yields on one-year certificates averaged 0.34 percent vs. 0.28 percent a year ago, and returns on five-year certificates averaged 0.9 percent vs. 0.83 percent.

Any real improvement appears to be on the distant horizon.

“It’s going to be a slow grind,” McBride said. “Looking out over the balance of the year, (savers) will still be trailing the rate of inflation.”

That doesn’t mean savers can’t do better. The best way to pump up returns is to shop nationally for the highest yields. And the search shouldn’t be limited to big banks.

“Look at online banks, community banks, credit unions. Cast a wide net,” Mr. McBride said.

People shouldn’t be afraid to do business with an out-of-town financial institution as long as it is federally insured, he said.

Currently, consumers can add a full percentage point to their CD returns by parking their savings at the top-yielding financial institutions. For example, the top-yielding one-year CDs nationally are paying around 1.5 percent vs. the average payout of 0.34 percent.

In addition, the top-yielding savings accounts are paying roughly as much as CDs without requiring customers to lock in their money.

Consumers can hunt for the best yields across the country at websites such as Bankrate.com and BauerFinancial.com.

“If you sit back and wait for higher yields to land in your lap, you will be disappointed,” McBride said. “You have to seek out the most competitive offers.

“Some banks won’t raise rates at all and others will be more aggressive about doing so. That is where you want to have your money.”