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I went into my bank the other day to cash a piddly little check. I know you can do it remotely with your phone, but what if I needed to grab another pen to add to the hundreds of pens I already have at home?
On a whim, I asked the teller for one of those printouts listing the current interest rates and annual percentage yields for their certificates of deposit. Stocks have been taking a minor beating, and I thought maybe I needed some psychological scaffolding around the concept of higher interest rates for longer.
The best interest rate on offer was a robust 5.11% — not bad for a return that is virtually guaranteed, a deposit that is FDIC insured, and, in this case, a commitment to keep the principal tied up for only 11 months. In the name of doing a little field research, I stuck ten grand into a CD.
The federal funds rate currently sits at 5.25% to 5.50%. The federal funds rate is, of course, set by the Federal Reserve, and it impacts everything from short-term borrowing costs to the returns you can expect on a CD at your local bank or credit union.
You’ll never quite get all the way up to the federal funds rate with a CD. When you’re within half a percentage point of the top of the range, though, you’re doing quite well.
The federal funds rate hit 20% in 1980 as the Fed struggled to contain double-digit inflation. While we are, at this point, nowhere near the type of inflation crisis faced in the early 1980s, continued consumer spending has kept inflation persistently stuck at a bit above 3%.
This means we are likely to face higher interest rates for longer, along with the stock market doldrums that entails. For long-term investors who are already making periodic contributions to broad, low-cost stock market index funds, there is probably no good reason to alter this strategy.
It is fun, however, to have a little side action in CDs as a way to get something tangible out of, and therefore celebrate, high interest rates, lest you sink into a depression every time you view your brokerage account balance over the next several months. Personally, having some money in a CD after having been out of the CD game for so long has also given me a bit of financial nostalgia for the Silent Generation.
My grandmother lived through the Great Depression, and for the rest of her life did not believe in putting her money into any financial instrument more complicated than a CD. This was not such a bad thing for a good portion of her long and productive life when interest rates soared. Sure, had she invested broadly in the stock market throughout that same period, overall her results would have been better. But my grandma was comfortable enough as it was, and really derived a solid sense of security from knowing that the relatively modest sums she had managed to save were protected by FDIC insurance.
I’m sure you know, or knew, someone like this yourself. Once I even litigated a probate dispute in which the decedent was referred to in the post-trial order as the “King of CDs” (unfortunately one of his adult children had wrongfully liquidated those CDs during his decrepitude to make failed bets on risky individual stocks). There are many examples of how the FDIC accomplished its purpose of restoring confidence in the consumer banking system, the huge popularity of CDs with the Silent Generation among them (this being an understandable preference given the world events folks in that age range lived through).
For us in the modern era, there is no indication that the returns offered by CDs will rival the stock market in the long term: even as rate cuts have been delayed, most economists still think the federal funds rate will go down before the end of the year. That being said, like me, you very well could find a deal on a CD above 5% right now, and there are certainly worse things to do with a chunk of your money at this moment in history.
Who knows? Perhaps a foray into CDs will even come with a gratifying ping of sentimentality.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.
