Interest Rates on Risk Free Investments are Below the Rate of Inflation for Now

The Federal Reserve Open Market Committee has kept their key benchmark interest rate, the federal funds rate, at a record low for over 5 years now. The Fed's policy has forced bank CD rates and all deposit rates down to record lows as well. The majority of banks and credit unions are offering 1 year CD rates, savings rates and money market account rates below 1.00 percent.

Average deposit rates reported by the FDIC are also down at record lows. The FDIC's current national average 1 year CD rate is at 0.20 percent, average money market rate is at 0.08 percent, average savings rate is at 0.06 percent and the average checking account rate is at 0.04 percent.

The majority of deposit account rates are so low your investments won't even kept up with the rate of inflation. The Consumer Price Index (CPI) increased 1.5 percent for the past 12 months ending in March. Finding the highest rates available right now is more crucial than ever. Even finding the highest rates on short term certificates of deposit or variable rate accounts you won't kept up with the current inflation rate.

What is one to do? Invest in U.S. Treasuries? If you think deposit rates are low right now, equivalent U.S. Treasuries with the same term pay even less. The best 3 month CD rates pay 0.45 percent while 3 month U.S. Treasury yields pay a measly 0.03 percent.

The highest CD rates on 1 year certificates of deposit have a current rate of 1.06 percent with an APY of 1.07 percent. Current 12 month U.S. bond yields are at 0.10 percent. Even longer term CD rates are higher than bond yields. The best 5 year CD rates around this week are at 2.30% APY and 5 year bond rates are at 1.62 percent.

Investing in bonds instead of CDs won't get you a higher return plus you can risk losing some of your principal if bond prices move down and you  sell before the bonds mature. If you're looking to preserve and not risk any of your principal your investments won't keep up with the rate of inflation these days.

The days of very low interest rates are going to come to an end in 2015 and possibly sooner if inflation picks up. The Fed has forecasted a need to increase the federal funds rate sometime in 2015 which will force banks and credit unions to increase deposit rates. Therefore it makes sense to stay invested in shorter term certificates of deposit or variable interest rate accounts. When rates move higher next year you can be in a position to earn a higher return.
Author: Brian McKay
May 15th, 2014