For the first time in about 10 years, returns on some savings accounts are outpacing inflation.
Thanks to the Federal Reserve’s policy normalization process – which has included raising interest rates – savers with money in high-yield online savings accounts are finally starting to reap benefits, as first noted by Bankrate chief financial analyst Greg McBride, who also said yields on certificates of deposit (CDs) have not been this attractive since 2009.
CDs are a secure form of bank deposit with a specified interest rate that require money to be stored for a certain length of time in order for investors to earn a planned return.
A 12-month certificate of deposit would have outperformed the S&P 500 by 8 percent last year, Axios noted on Monday.
CDs – which are issued by commercial banks and insured by the Federal Deposit Insurance Corporation for up to $250,000 – tend to earn more money than a traditional savings account because banks are generally willing to pay more to hold larger sums of money. Users cannot withdraw the funds before the maturity date without penalty.
However, since interest rates have been historically low in the wake of the financial crisis, it has taken a while for banks to raise rates – making it somewhat of a losing investment. But now, some banks are beginning to raise their interest rates above 2 percent – potentially making CDs a more attractive safe haven than the 10-year Treasury, particularly as volatility roils the stock market.
Goldman Sachs, for example, now pays rates of 2.25 percent, Axios noted, though some are paying even more.
The 10-year Treasury yield was about 2.6 percent as of Monday.
The Federal Reserve raised the benchmark federal funds rate four times in 2018 – most recently during its December meeting – and anticipates it will do so two more times this year. However, it expects inflation to remain below its 2 percent target.