Here come the 5% CDs

You can already get 5% on a one-year CD if you shop around, and there should be more—and maybe better—on offer soon following the latest economic news, which has sent the money markets jumping around.

January’s inflation data came in higher than expected, and the markets were surprised by the news, even though Federal Reserve Chairman Jay Powell had basically told them this was going to happen at his press conference a couple of weeks ago. 

In response, the money markets now see the Fed hiking short term rates by a further 0.75% percentage points by the fall, and maybe by as much as a full point. That’s according to the market data tracked by the CME.

That could take short term rates, currently 4.6%, over 5.5%.

Meanwhile, according to Bankrate.com, the national average at the moment for a one-year certificate of deposit is just 1.44%.

No, really.

In America, it seems, it’s illegal for you to rob a bank, but not the other way around.

As a result you need to shop around to get the best deals.

You can already get 5% on a one-year CD in a couple of places, such as Capital One and BMO Harris.

We should expect more of these, and better, as the market adjusts to the latest economic news.

Watching decent interest rates return on certificates of deposit and savings accounts is like watching wildlife return to a lake after the Environmental Protection Agency finally cleans out all the pollution. This is what CDs used to look like, in the before times.

Retirees, and other low-risk savers, have suffered for years from minuscule savings rates in the aftermath of the global financial crisis of 2008. The Federal Reserve and other central banks slashed rates to zero and kept them there as long as possible to stimulate economic activity. They did it again during the Covid lockdowns.

How high will CD rates go? Naturally we don’t know for sure.

According to Hoyle (or basic economics), when the Fed raises interest rates banks and credit unions should woo savers by passing those higher interest along through higher interest on savings accounts and certificates of deposit, or CDs.

But it isn’t quite that simple. And it’s not just because banks want to pay you as little interest as they can get away with. (Nonprofit credit unions, which are owned by their customers and have no incentive to shortchange you, are subject to the same constraints.) The interest rate on CDs and other products will depend on where the market expects short-term rates to head after they rise. 

Even now, after the latest inflation surprise, Wall Street still suspects rates will peak in the fall and may even start coming back down by Christmas.

The latest monthly inflation data works out at an annual rate of more than 6%. The markets, and the Fed, are still betting aggressively that that is going to come down. But unless it does, someone buying a one year CD paying 5% interest, or even more, is basically going backward in real purchasing power terms. Meanwhile you can buy individual inflation-protected Treasury bonds issued by the U.S. Government which will guarantee you inflation plus 2% a year for the next one or two years.

That strikes me as a great deal, especially for savers who don’t want any risk. But if I’m buying a regular CD I would want 5%—at least. Time to shop around.