Low Rates Squash Interest on CDs

While record-low interest rates are a blessing for Commack residents in need of a mortgage, they're crippling to those hoping to earn interest on deposits.

Rates on certificates of deposit, which historically pay the highest interest of all savings products, have fallen steadily since 2008 and are now the lowest they've been in decades.

Money savers can now earn more interest on some high-yield savings accounts than they can on a CD, which comes with the added disadvantage of locking up money for months at a time.

Big banks like Chase, Bank of America and Citibank, which all have Commack locations, are currently paying less than 1 percent on one-year CDs, marking the first time CD rates have dropped that low since the 1950s.

Chase will pay local residents the least after one year, tacking on just 0.25 percent to CD balances after 12 months.

That bank, along with TD Bank and Capital One Bank, which give 0.4 percent and 0.5 percent interest on one-year CDs, respectively, came in below the national average of 0.61 percent for a one-year CD this week, according to Bankrate.com.

Commack residents do have some higher-interest options, though they're nowhere near as high as rates were three years ago when a one-year CD earned more than 5 percent interest.

The two credit unions in the area, Teachers Federal Credit Union and Bethpage Federal Credit Union, both pay more than 1 percent on one-year CDs, and Bank of Smithtown will dish out 1.15 percent after one year. That bank was recently bought by Bridgeport, Conn.-based People's United Bank, but spokesperson Brent DiGiorgio said he couldn't say what will happen to the local CD rates until the deal closes later this year.

Banks choose internally to lower or raise deposit rates, but decisions are largely based on the national prime rate, the federal funds rate and rates on loans. Because banks make money on the spread between deposits and loans, if loan rates fall, deposit rates must fall further so income outweighs expenses. The federal funds rate remains between zero and 0.25 percent, where it's sat since the end of 2008, as the Federal Reserve continues to try to stimulate the economy.

Low rates have caused many customers to gravitate away from CDs and to move into money market accounts at Bethpage FCU, according to Chief Financial Officer Brian Clarke.

Money markets are historically lower-paying than CDs, but that gap has narrowed and many now feel the payoff for tying up funds in CDs isn't large enough, he said.

Money market rates vary with the market, as opposed to CD rates, which are fixed, but cash in money market accounts is always available.

Local residents looking for higher-yield CDs will have to tie up their cash for even longer. Five-year rates averaged 1.74 percent nationally this week, according to Bankrate.com.

"Historically, members have gotten more six-month and one-year CDs," Clarke said. "But they need to be compensated for locking up their money so they're moving to two-, three- and four-year CDs."

There's no end in sight for dismal savings returns on certificates of deposit. Experts don't expect interest rates to pick up any time soon, though most caution the market is fickle and could always turn tomorrow.

"I think rates are gong to be this low for at least another year," Clarke said. "We have the double whammy of unemployment and low housing prices and I think the Fed will continue to do what it can to stimulate the economy."