How Are CD Rates Changing?

CD Rates Could be Amiss

By Claire Baierl and Alison Grillo
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On the sun filled street of Fresh Pond Road in Ridgewood, sits Maspeth Federal Savings bank. It’s a small building on the corner of the street, lined with bricks and bright green shades. Just a six minute drive away is Ridgewood Savings bank, a tall building rich in history that sits right in the center of bustling Myrtle Avenue.
What makes these banks stand out from your Chase or Bank of America on practically every block of Queens? Is it the warm smiles that greet customers, the bank teller that knows your name, or could it be something more concrete, something like Credit Deposit rates.
While some may not be familiar with Credit Deposits, for others, this savings product can offer a vital influx of money each month. The type of account and rate one holds could be the difference between getting a Toyota or a Lexus.
Credit Deposits (CD) are savings accounts for those that want to hold a lump sum in the bank for a fixed period of time. The bank, in turn, pays the holder interest on that lump sum. And yet, this rate of interest is constantly changing.
CD rates fluctuate depending on a variety of factors, and in the past two-decades, bankers have seen dramatic highs and lows. The 1980s saw one of the highest rate increases in over 60 years. Rates rose to double digits, banks were giving out 3-month CDs at 18.65% at its peak.
On the other side of the spectrum, after the housing crisis of 2008, banks were flush with cash infusion bailouts given to stabilize the economy. What this meant was that banks no longer felt dependent on competitive interest rates to bring in deposits. And with banks less focused on attracting CD accounts, interest rates on these accounts fell to record lows between 0.20-0.30%.
These fluctuations are based on a variety of factors. At its most basic level, the CD rate one receives depends on the CD length. In the past, at times of economic stability borrowers often received higher rates the longer they kept their money in the account.
Another main driver of what rate a CD can earn is the Federal Funds Rate. This rate, determined by the Federal Reserve, can change up to eight times a year depending on the economic stability of the country. As the funds rate rises, banks often follow suit.
Another factor is changes in the Treasury yield, the interest rate the government pays on its debt. Similar to the Federal Funds Rate, as the interest for Treasury yield increases, CD rates increase as well.
Banks sometimes find it hard to attract customers and CD rates are one way they can draw in borrowers. Competition among banks is another factor that affects rates, the higher the rate, the more competitive stand in the market.
Competition between banks can be dramatic, with some rates for national banks such as Bank Of America as low as 0.02% for a 12 month fixed term CD with a minimum deposit of $1,000 versus at your local Ridgewood Savings Bank, one can open a 12 month CD at a rate of 4.25% with a minimum balance of 100$.
For Neil Hect, a Gowanus native, CD rate competition has about everything to do with where he banks. You won’t catch him in a Bank of America either, as a former local bank manager, he joked, “I wanted our slogan to be, ‘we won’t screw you like bank America will.”
“Higher interest rates do bring about a competitive nature for banks, causing clients to feel if they want higher rates they have to move, or open up several banking relationships,” said Anna-Marie Vallone, vice president of First Central Savings Bank, which has branches throughout Queens.
With the rise in demand for high yielding CDs in our current economic cycle, rates between banks have risen fast enough to constitute a “CD war,” said Christian Hernandez, vice president and director for retail banking at Maspeth Federal Savings Bank.
And yet, as more and more customers seek the highest rates possible, banks that cannot compete are left in the dust. “Everybody is now hurting the banks by trying to find better interest rates,” said Hect. “Your little bank down the street needs to make loans. They need to get deposits,” he urged.
There are large differences between certain banks, whether a local branch or your neighborhood Bank of America, each with their own perks and disadvantages. But one thing is certain, banks need funds, whatever that source may be.
For your local bank, one of these ways to maintain funds can be the lending of deposits such as a CD. And often, income will come from borrowing deposits at a low rate for shorter term investments while lending for long-term investments at a higher rate. Yet in our economy today, this is where the story begins to complicate.
“In a perfect world, when somebody sits in economics class, they’re taught the time-value of money. The longer you agree to lock in your money, the higher the rate of interest you should expect,” said Mark Sanchioni, Chief Banking Officer for Ridgewood Savings Bank. “Right now, that principle is not holding true.”
In our current economy, CD rates are in a uniquely confusing state. Now, shorter-term investments often have higher interest rates than their long-term counterparts. This phenomenon is called the inverted yield curve.
The inverted yield curve is a downward-trending curve that displays for investors in simple terms the differences between yields on bonds of different maturities. This doesn’t happen often, but when the curve inverts, it is a sign of something amiss.
Since 1978, the yield curve has only inverted six times in total not including this current term, and a recession has followed shortly after in each of those cases. The current market shows a steeply curved inversion, which explains the current high rates of over 5% returns.
“Bankers need to be careful,” said Sanchioni. “We’re always mindful of what our loans are earning, and what our deposits pay. You want to make sure the numbers aren’t inverted.”
And yet, past performances do not always guarantee a future recession. The last inversion was in 2019, and while a short recession did follow, many other factors were in play at the time that could have been a part of the cause.
While the future is still up in the air, borrowers still have time to take advantage of the current high rates. “I do see deposit rates stabilizing and plateauing, and then I see them decreasing. I do not see them going up,” said Hernandez.
As for a recession, no one can be sure.
“Is it gonna start next week? I hope not,” said Hect. “I’ve got two second interviews lined up next week and if a recession shows up next week, they may cancel one or both. I want to get a job.”




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