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Fed Acknowledges Current Policy Hurts Holders of Certificates of Deposit

The Federal Open Market Committee had their September two day meeting last week and kept the target range for the federal funds rate at 0 to 1/4 percent and extend their highly accommodating stance of monetary policy from the end of 2014 until the middle of 2015. What his means for holders of interest bearing assets, like certificates of deposit is these low current CD rates will remain low until the middle of 2015 and possibly into 2016 if the economy doesn't pick up steam and inflation remains very low.

Right now bank CD rates on 1 year certificates of deposit are averaging 0.26 percent in the FDIC's weekly survey. The best CD rates on 1 year certificates of deposit are at 1.10 percent. The rate curve on 1 year to 5 year CD interest rates is flat. The FDIC's national average 5 year CD rate is at 0.98 percent and the highest CD rates on 5 year certificates of deposit are at 1.85 percent, about 75 basis points difference between 1 year CD rates and 5 year CD rates.

The Fed Chairman, Ben Bernanke, said in a press conference that his colleagues and he are "very much aware that holders of interest-bearing assets, such as certificates of deposit, are receiving very low returns".

Ben also said "low interest rates also support the value of many other assets that Americans own, such as homes and businesses large and small. Indeed, in general, healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote." Read the entire press conference transcript here: Ben Speaks.

While Ben is correct about the value of fixed assets increasing since the Fed is making money so cheap to borrow, chances are if you're retired you don't own a business or invest in riskier assets like stocks. Retirees have most of their assets in no-risk interest bearing accounts earning less than 1 percent which are not even keeping up with the rate of inflation.

Sure if you are retired and own a home the value of that home might be finally moving higher again after the housing bubble bust a few years ago, but if you're not tapping the equity the increase in value doesn't provide you any income. You either would have to sell your home and incur the cost of renting or have a reverse mortgage to tap into the equity.

All holders of interest bearing assets are losing out these days because of the "accommodating stance by the Fed. You're between a rock and hard place, your investments are either not keeping up with the pace of inflation or you have to make risky investments in the equities market which goes against what the experts recommend when you're retired.
Author: Brian McKay
September 17th, 2012