Wife asked something I am to stupid to answer. Why is the spread between inflation rate which is at this time I believe is 8.1/2 % and fixed rate savings instruments such as cd's only 1.5% at the highest so different? What is the normal spread and how is it determined. How long does it take to catch up closer to real rate of inflation? I was thinking back to the Carter days when I had to pay 13% interest for a rental property but couldn't remember what a cd was paying at that time.
Thanks for the wonderful question jmk!!!
The short answer is that banks are ripping off consumers because they can(-:
Actually, CD's are tied directly to the interest rate of the Federal Reserve, which has been near zero. They are only tied to inflation INdirectly.
When the Fed hikes interest rates to FIGHT inflation, then the banks can hike THEIR interest rates on various instruments, that includes what they pay for CD's. There will always be a lag time.
In this case, we've gone from near 0% inflation and interest rates to the highest inflation in 40 years in a flash......... so even though the lag time is short, the difference is historical.
In the past, the inflation would creep (up or down) and the Fed would adjust interest rates slowly (up or down) and CD rates would slowly follow(up or down).
This time its been the most extreme in history by a very wide margin and extremely noticeably.
Here's more:
https://www.bankrate.com/banking/cds/cd-rate-forecast/
In 2021, both short-term and long-term CD rates started out low and progressively decreased further as the pandemic continued and inflation steadily rose. Banks were already flooded with consumer deposits and were not compelled to win over new customers with attractive rates.
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The Fed has penciled in three rate hikes for its federal funds rate in 2022 and three more in 2023. Once the Fed increases this short-term benchmark interest rate, yields on deposit products like CDs and savings accounts are likely to rise along with it.
The ongoing pandemic and how it impacts the economy could still affect the Fed’s plans to raise interest rates and taper bond buying in 2022.
https://www.bankrate.com/banking/cds/are-cds-worth-it-right-now/
CD rates are influenced by interest rate moves by the Federal Reserve. The U.S. central bank’s key rate has been pegged at zero percent since March 2020 in an effort to stimulate the economy during the COVID-19 crisis, and subsequently, CD rates are currently low.
This key rate is expected to rise in 2022, however, as the Fed has penciled in three increases for the year. But Greg McBride, CFA, Bankrate chief financial analyst, forecasts just two such increases in 2022.
The national average for one-year CDs will rise to 0.35 percent and the average for five-year CDs will increase to 0.56 percent, McBride predicts, adding that the highest-yielding CD rates in 2022 will likely more than triple those average rates.
Other factors that can impact CD rates include the 10-year Treasury yield, competition among banks and the need for deposits among banks.
metmike: The inflation comes first.......BEFORE the interest rates go up. Now is the time to lock in borrowing costs for money that you don't have at very low interest rates, historically before they go up but its the worst time to use money that you do have for generating interest income.
https://www.nytimes.com/2022/03/10/business/economy/cpi-inflation-february-2022.html
https://www.yahoo.com/video/putins-price-hike-gasoline-caused-212357091.html
The Russian invasion of Ukraine and the resulting increase in gas prices is responsible for most of the record increase in US inflation last month, US President Joe Biden says. "Seventy percent of the increase in prices in March came from (Russian President Vladimir) Putin's price hike in gasoline," Biden says during a visit to the midwestern state of Iowa, after government data showed consumer prices rose 8.5 percent over the 12 months to March.
metmike: I don't want to insult anybody's intelligence but you'd have to be pretty gullible to believe this blarney. Some of this has been the result of the war in Ukraine and factors outside the control of Biden but continuing to call this "Putin's price hike" is extremely dishonest and this administration's policies are also part of it, including the worst energy policies in US history by an off the charts margin.