What’s Going On With Rates?

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July 15th, 2016

The short answer is - I don’t know; or if you’re under 25, “IDK” with some sort of emoji after it. If someone tells you they know what’s going to happen with this rate environment, run the other way.

In December of 2015, the Federal Open Market Committee (FOMC) raised rates by 0.25%. That was the first rate increase since June of 2006, and the first time rates have changed since December of 2008!  Nobody expected us to be in this low interest rate environment for 7½ years, but here we are. We have seen historically low mortgage rates and yields on the 10-year and 30-year, and U.S. Treasury bonds hit all-time lows on July 1, 2016 with yields of 1.378% and 2.187%, respectively. Why the flight to safety you ask? Is it the political environment? The recent Brexit vote in the U.K.? The increase in soft target attacks worldwide? Or a combination of all of these? One thing the markets never like is uncertainty, and unfortunately we live in a world littered with it. 

What does all of this mean to banking customers? That depends on what stage of life you’re currently in. If you’re borrowing money, you’ve never been happier as we haven’t seen rates this low for such a prolonged period of time. If you’re saving money and looking for a decent return on FDIC insured monies, you’re less than pleased right now. According to the FDIC’S WEEKLY NATIONAL RATES, which is calculated based on a simple average of rates paid by all insured depository institutions nationwide, the nationwide average money market rate is 0.08%, and a 12 month certificate of deposit is 0.22%. A large group of Americans who have traditionally used CDs and savings account interest to supplement their social security have been hit the hardest with these low rates. This doesn’t mean you should keep your money in your mattress, but it does mean you should ask questions and develop a strategy.

There are a number of viable options for the funds you keep in the bank. One option is to go liquid and keep your savings in a high-yield FDIC insured money market account. This gives you the most flexibility with a higher rate than most interest bearing checking accounts or savings, and the liquidity not offered by certificates of deposit. Another option is to create a CD ladder, which is a combination of CDs all maturing at different times. Having a number of CDs with maturities at 1, 2, 3, 4, and 5 years will allow you to hedge your interest rate risk and will give you a higher blended yield than doing just shorter term CDs. I’m an advocate for combining both these methods and placing funds in FDIC insured money markets as well as CDs. 

In short, don’t ignore your savings and take a look at the rates you’re receiving. Most people have relationships at multiple financial institutions and are receiving different rates of interest. If you have a brokerage account with liquid funds in it, take a look at your rates. Instead of asking the question, “what are Yellen and the Fed going to do?” ask yourself “does it make sense to refinance my mortgage?” or “are my liquid funds and savings working for me?” Just because the rate environment is low doesn’t mean your hard earned funds shouldn’t be working for you. You just need to be asking the right questions.

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