Rising Rates are Good News for Bank Deposits
LYNN NEARY, host:
On Fridays we focus on your money. Today, rising interest rates aren't necessarily a bad thing.
It used to be that saving money just didn't pay. If you put cash in a bank certificate of deposit, you might make a measly one percent. Today, some CDs pay five times that.
NPR's Frank Langfitt reports.
As recently as two years ago, CDs were a lousy investment. On average, they paid below the rate of inflation. That means people who put their money into CDs were actually losing purchasing power.
Lisa Mino(ph) heads consumer deposits at M&T Bank in Buffalo. Clients, she says, were really frustrated.
Ms. LISA MINO (Consumer Deposits, M&T Bank, Buffalo): You could sense the pent up demand. I mean, these customers did come in that were CD purchasers and just, aren't your rates, you know, ever going to get better?
LANGFITT: Today M&T Bank offers as much as 5.25 percent on an 18-month CD. Some internet banks pay even more.
Mino says banks are now trying to outdo each other in the once sleepy CD market, to pull in more deposits.
Ms. MINO: There's a lot more advertising out there, certainly more than there was even a year ago. So the market has become very, very competitive. People are wanting to get these dollars.
LANGFITT: Why are CDs paying so much? Over the past couple of years, the Federal Reserve has raised interest rates 17 times to fend off inflation. That's made it more expensive for people to borrow money, but it's been great for savers - especially seniors who are looking for a decent return with little or no risk.
Greg McBride is a senior financial analyst at BankRate.com, a personal finance website.
Mr. GREG MCBRIDE (Senior Financial Analyst, BankRate.com): The increase in increase rates was really music to the ears of many retirees and investors dependent upon interest income. They really paid their dues in 2003 and 2004, when interest rates were at rock bottom levels.
LANGFITT: Many older investors buy CDs because they're federally insured and secure.
Mr. JOHN CLEMENTS(ph) (Retiree, North Carolina): Well, I want to keep what I've got.
LANGFITT: That's John Clements. He's a retired chemist for the Environmental Protection Agency who lives in Chapel Hill, North Carolina. When Clements was younger, he invested in aggressive stocks. Now, at 77, he has most of his money in CDs.
He says today's comparatively high rates will mean more money for the next generation.
Mr. CLEMENTS: Fortunately I'm in position I don't really need the interest on the CDs to live on. I have fixed income from my government job and it takes care of me. So I'm really doing it for my son and daughter.
LANGFITT: Like some investors, Clements stays close to home. He only buys CDs at the local bank or credit union, where he gets between 4.75 and 5 percent on CDs that last from six to 12 months.
Greg McBride, of BankRate.com, says people can get even more if they look elsewhere.
Mr. MCBRIDE: It really pays to shop around, because, while 3.8 percent is the national average, you can actually earn yields of 5.6 percent on a one-year CD, if you're willing to deposit your money at an out-of-state bank.
LANGFITT: Yields for CDs could go even higher. Some analysts think the Federal Reserve will raise interest rates at least one more time. The Fed's next meeting is in August.
Frank Langfitt, NPR News.