The cliché in the banking industry goes like this, "if I could tell you which way interest rates were going, I wouldn't be here working at this little bank." An obvious truth, but I spent some time yesterday chatting with my wife's grandmother (who turns 92 in April!) about CD rates and savings account rates, triggering this commentary.
A lot of the economic data from the past few months has been at least mildly encouraging, and we have seen significant improvements in consumer confidence. But, with unemployment remaining high, housing still in the dumps, continuing uncertainty in foreign markets, and an election year upon us, I would be personally be surprised to see any meaningful increase in interest rates during 2012 (Yes, I know the Fed is supposed to be totally apolitical in its activities, but historically things have usually been stable in election years since any moves in either direction can be viewed as politically motivated).
So, what is the consumer to do? Keep renewing one year CDs at less than 1% yields? Interestingly, we have recently seen a small up-tick in clients buying longer-term CDs, say for example, two or three years in duration. While it's impossible to be sure if this is a good idea, the difference in yield on a three-year CD (APY of 1.75% compared to .95% on a one year CD at The Victory Bank) is enough to attract some investors, and if rates remain static for the next 12 to 18 months, extending out to three years now may be a good strategy for some of our clients, especially those who are long-term CD investors.
I do believe that there will come a time that the Fed will back off and allow interest rates to start rising to more traditional levels. Of course, nobody wants to be stuck in a long-term CD yielding less than 2% when the market has jumped to 3 or 4% or even higher! On the other hand, continuing to stay short in the hopes of near-term increases may leave a lot of money on the table that can never be recovered.