Retirees Rejoice as Bank CD Rates Move Higher

Retirees rejoice as bank CD rates move higher, providing relief from low rates. Certificates of deposit are a very popular investment option for retirees who rely on interest income. Unfortunately, over the past decade, CD investment returns have been dismal because of the Federal Reserve's policies forcing historically abysmal low interest rates.

Since the Financial Crisis back in 2008 and 2009, the Federal Reserve's policies were designed to foster growth. These polices sank interest rates and CD rates to historic lows. The Fed's policies included lowering the fed funds rate to near zero percent, driving short term interest rates lower. The Fed also bought U.S. Treasuries by the trillions to force long term interest rates lower.



The Fed's policies were detrimental to retiree interest income but that has changed. Economic growth is picking up, the unemployment rate is under 4.00 percent, and the inflation rate is nearing the Fed's target of 2.00 percent. As a result of these strong trends, the Fed has embarked on a tightening cycle, forcing interest rates higher.

Bank CD Rates Move Higher

Over the past 30 months, the Fed has increased the fed funds rate six times. The fed funds rate went from a range of zero percent to 0.25 percent to a range of 1.50 percent to 1.75 percent. The fed funds rate is expected to be increased at least twice in 2018. You can see a list of rate increases - Fed Funds Rate Increases.

During the same 30-month timeframe, CD rates moved higher and are finally getting to some decent levels. 5 year CD rates are just above 3.00 percent, a level we have not seen since 2008. 1 year CD rates, which were under 1.00 percent from 2009 to 2014, are now nearing 2.50 percent.

If the Fed does increase rates two or three more times in 2018, CD rates will also move higher. Two fed funds rate increases would push 5 year CD rates near 3.70 percent and 1 year CD rates above 3.00 percent. If there are three rate increases, 5 year CD rates would head towards 4.00 percent and 1 year CD rates would hit 3.25 percent. These are all encouraging signs and something we've needed for a long time. Let's hope the trend keeps moving up.