Low Rates Keep Savers Suffering For Borrowers' Boon

Federal Reserve Chairman Ben Bernanke recently told Congress that interest rates likely would remain "exceptionally low for an extended period."

That was great news for borrowers, but not for savers.

Risk-averse savers who shun stocks and bonds often turn to government-insured Certificates of Deposit. With these investments, savers tie up their money for a set period — anywhere from three months to five years — in return for a steady, reliable payout from a financial institution.

But these days, CD interest rates are so low, many investors feel cheated.

Interest rates have been at very low levels ever since the financial crisis hit in the fall of 2008. The shock caused the stock market to plunge, credit markets to freeze up and housing sales to stall. To help bolster the economy, the Federal Reserve decided to drive down interest rates.

Low-cost loans helped make housing more affordable, and made it easier for businesses and consumers to get loans. But the strategy of propping up borrowers came with a cost — and savers had to pay it.

When borrowers are paying low interest rates, the banks that lend them money aren't getting much in return. So in late 2008, savers who put money into financial institutions in the form of CDs did something good for the economy: They helped make cash available for loans. But they did not get much of a reward in the form of interest payments.

Today, the economy is more stable, but the Federal Reserve remains cautious. The central bank policy makers fear that if they allowed rates to rise, they could choke off the recovery.

As a result, interest rates on a one-year CD remain low at roughly 1.5 percent. A five-year CD offers about 3-percent interest.

Most economists predict interest rates likely will rise over the next year or two. So it may not be a good investment strategy to tie up money now for five years when the returns will be bigger next year.



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