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Fed Study: CD Rates Are Less Attractive
Savers are veering away from stashing their cash in low-risk certificates of deposit (CDs), according to a recent study by the Federal Reserve. The findings may not be much of a revelation given the extremely low interest rates on most deposit accounts.

From 2007 to 2010, the number of U.S. families that held CDs fell from 16.1 percent to 12.2 percent, the Fed study reported. Meanwhile, the median deposit balance in CDs dropped from $21,000 to $20,000.

“Increased volatility in stock and bond markets made CDs more attractive relative to those investments as a haven from risk, but the convergence of yields on all relatively safe assets at a level near zero implied that the advantage CDs typically hold over transaction accounts was greatly reduced,” the Fed said in the report.

A 5-year CD at Barclays’ online bank is paying out 1.80% APY while a savings account from TIAA Direct carries 1.25% APY. On a $10,000, assuming rates don’t change, the difference in interest earnings is $292 over five years. Many savers may not want to lock in their money for such long time for such a meager boost in their savings.

The decline in savings yields resulted from the Fed’s monetary policy to support an ailing economy during the recent recession. From 2006 to 2008, the federal funds rate fell from 5.25 percent to the 0 – 0.25 percent.

Despite losing much of its appeal and yield advantage, CDs are not obsolete.

Unsurprising, the Fed study found that CDs remained popular among high-income earners and older Americans. The upper percentile of income earners held money money in various types of assets. And, older folks, who are less likely to be bringing in income, need to maintain low-risk assets to live through retirement.

The Fed study does not show the duration of CD accounts held by U.S. households. They could be 1-year CDs, for those waiting for rates to rise, or higher-yielding CDs from several years ago.

In January, the Fed said that it projects interest rates to remain depressed until late 2014.

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