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Ask Money

Better rates on savings

Chris Farrell Jan 27, 2010

Question: Like many conservative “investors” I long for the days when CD rates were higher than 1% or less, when the government wasn’t trying to manipulate me into the all too risky stock market which demonstrated in the last decade that it is not to be trusted as a secure repository for retirement savings. The “free market economy” serves those at the upper income levels, not those of us who want to live without spending precious time on keeping track and understanding basic concepts of the abyss of the investment world. It just does not interest me, and the past two years have shown how unreliable, indeed, destructive risk can be. My question is, is there a movement to promote a return to CDs offering higher interest rates? Thank you for the voice of reason you present on public radio. Brigitte, Amherst, New York

Answer: I’m not aware of any movement to promote a return to higher yielding savings accounts or certificates of deposit for the everyday saver. And you’re right to upset over how little interest you’re getting on your savings. One factor is the dampening effect of the Great Recession and the subsequent anemic recovery. Another force is inflation is essentially non-existent with demand down sharply and unemployment at double digit rates. But to a large extent today’s low rates reflect how savers bailed out the banking industry. In essence, you make a fraction on your savings and the banks earned profits by investing your deposits in higher yielding investments, especially U.S. Treasuries. (Of course, it’s more complicated than that, but not much.) Bailouts stink. It’s just that the alternatives are even worse.

It’s a reasonable bet that over the course of the next year or so you’ll get an opportunity to earn more on your savings. The economy does appear to be on the mend. And if the recovery becomes self-sustaining you’ll start earning at least somewhat more on savings accounts, CDs, and the like. The demand for credit grows when the economy is expanding, and that puts some upward pressure on rates. The Federal Reserve will eventually hike its benchmark interest rate, a move that will ripple throughout the fixed income market. Inflation fears will stir during the expansion, too. Taken altogether, and assuming there isn’t a double-dip recession in our future, the next move in rates will be up–at least a bit.

What are some safe savings alternatives to CDs? I would look into federally insured online savings accounts since they typically pay a better rate than their brick-and-mortar peers. You could also look into buying short-term Treasury bills from the federal government at treasurydirect.gov. You won’t pay any commissions. There is no credit risk with Treasuries. There is no state and local government tax levy on U.S. Treasuries. The historic record shows that short-term Treasuries will protect your money against the risk of inflation. To be sure, you won’t make much interest but when rates start climbing you’ll be able to reinvest the money at the higher rates.

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