Savers lulled to sleep in recent years by near-zero returns on CDs might have reason to crack open an eyelid sometime next year.
Even though the Federal Reserve raised short-term interest rates a notch in December, relatively few banks passed along any benefit to consumers by boosting deposit rates, according to Greg McBride, senior financial analyst with interest rate tracker Bankrate.com in North Palm Beach, Florida. The Fed’s quarter-point increase was the first rate hike in nearly a decade.
“Banks are sitting on a pile of deposits. That’s the factor that is going to keep a lid on yields even in an environment where the Fed is actively raising rates,” Mr. McBride said.
Yields on six-month certificates of deposit averaged 0.17 percent nationwide last week compared with 0.16 percent a year earlier, according to Bankrate.com. At the same time, yields on one-year certificates averaged 0.28 percent vs. 0.27 percent a year ago, and yields on five year certificates averaged 0.83 percent vs. 0.89 percent.
By comparison, savers were earning an average of 3.77 percent on one-year CDs and 4.02 percent on five-year certificates in August 2007 — the peak just before the last recession triggered a relentless slide in rates.
CD rates have remained near historic lows locally, too.
The top 10 retail banks in the Pittsburgh region were paying an average of 0.15 percent on one-year certificates last week, according to a Pittsburgh Post-Gazette survey. That’s essentially unchanged from 0.14 percent nearly two years earlier.
The outlook for more Fed rate hikes is mixed, with some economists expecting the central bank to hold off on another quarter-point increase until after the November elections. Others are projecting two quarter-point hikes this year, with the first one coming this summer.
But any real relief for savers appears to be on the distant horizon.
“We think rates will move up slowly, but surely, over the second half of the year and next year and maybe actually will add up to some real money [for savers] by 2017 or 2018,” said Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh.
Mr. Hoffman expects two quarter-point hikes this year and two, or perhaps even three, more increases in 2017.
“Maybe two years from now we might see CD and money market rates close to 1.5 or 2 percent,” he said. “That’s still historically low, but after seven years of near zero rates, it will be more noticeable in terms of income that savers get.”
The Fed wants to raise rates to head off inflation but must be careful not to move too quickly and risk sapping the recovery.
With the annual Consumer Price Index still well below the Fed’s 2 percent target, “there’s no sense of urgency” to step up the pace, Mr. Hoffman said.
“We think the process of a very gradual rise in rates is going to persist beyond the end of this year,” he said.
Mr. McBride of Bankrate.com said the best way for savers to pump up their returns is to shop nationally for the highest yields.
Right now, consumers generally can add a full percentage point to their CD returns by parking their savings at the top-yielding financial institutions, he said.
People shouldn’t be afraid to do business with an out-of-town bank or credit union as long as the institution is federally insured, he said.
Consumers can hunt for the best yields across the country at websites such as Bankrate.com and BauerFinancial.com.
Mr. McBride also noted that the top-yielding savings accounts are paying roughly as much as CDs without requiring customers to lock in their money.
Another way to boost returns is to ask about special deals. Banks often offer higher “off term” promotional rates when they want to attract deposits.
Locally, examples include FNB, which is offering a 19-month CD yielding 1 percent; Dollar Bank, which is paying 1.25 percent on a 25-month certificate, and First Niagara Bank, which has a special 12-month CD yielding 1.01 percent.
Keep in mind that promotional offers may have extra restrictions.
At S&T Bank, for example, a special 24-month CD yielding 1.5 percent is only good on money that hasn’t been on deposit with the bank in the past 30 days.
Patricia Sabatini: PSabatini@post-gazette.com or 412-263-3066.
First Published: May 5, 2016, 4:00 a.m.