Certificate of Deposit Rates Likely to Remain Low Until 2015 or 2016

For many years now, certificate of deposit (CD) rates have fallen to record lows as the Federal Reserve has kept interest rates near record lows. If you thought bank CD rates would increase along with the surge we have seen in bond yields and mortgage rates, you'll be surprised to see that isn't the case.

CD rates remain near historical lows despite the fact that 30 year mortgage rates have increased from 3.50 percent on average to 4.50 percent and 10 year bond yields have increased from 1.62 percent to 2.70 percent the past month. Unfortunately, the increase in bond yields and mortgage rates won't cross over to CD rates any time soon.




We probably won't see any increase in CD interest rates until at least 2015 at the earliest and any significant increase in rates probably won't happen until 2016. Last month, the average CD rate on 12 month certificates of deposit was 0.66 percent. This month the average 12 month rate is higher but only averaging 0.70 percent.

An increase of only 0.04 percent won't help increase the income of seniors who rely on interest income for living expenses. Retirees' income has been squeezed for years now as interest rates have fallen. Back in 2008, you could find CD rates at banks for 1 year CDs around 5.00 percent.

These days the best CD rates for 1 year CD accounts are just over 1.00 percent and there are only a handful of banks offering 1 year rates above 1.00 percent. Interest rates on all CD accounts are so low, investors in CDs are not even keeping up with the pace of inflation. The past 12 months the Consumer Price Index (CPI), the governments measure of inflation at the consumer level, has increased 1.7 percent.

You can see how investing in the highest CD rates available for 1 year CD accounts doesn't even keep up with the pace of inflation. Even going out longer term you still won't be able to keep up with inflation. The national average 2 year CD rate is at 0.84 percent and the national average 5 year CD rate is at 1.33 percent.

Granted, there are a few banks offering 5 year CD rates that are higher than the rate of inflation but their rates are marginally higher. The best CD rate on Monitor Bank Rate's 5 year rate table this week is at 2.03 percent with an APY of 2.05 percent, 0.35 percent higher than the current inflation rate.

There are a couple of reasons that bank CD rates and credit union CD rates won't be moving higher any time soon. The federal funds rate has been just above zero percent and the Federal Reserve doesn't plan on increasing the rate until the nation's unemployment rate falls below 6.5 percent, which the Fed believes will happen sometime in 2015.

The other factor keeping interest rates low on all deposit accounts is that banks don't need money. Since the financial crisis, banks had to improve their balance sheets to be able to withstand another crisis. Banks are now flush with cash and are not lending as much as they used to, so there is no need to raise cash by increasing deposit rates.

The best course of action to take until interest rates increase is to stay invested in certificates of deposit of 1 to 2 years. That way you can take advantage of higher CD rates when they finally do arrive. The other alternative is to make riskier investments but as you know, you are risking your principal with those investments.