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Saturday, July 27, 2013

CD rates, 1982 and now

I’m cleaning out stuff, and found a statement from my first IRA CD.  IRAs became generally available in 1982, and my first CD was a 3 year CD with a rate of 15.5%.  You could put $2,000 annually into an IRA, so that’s what I did in January, 1982.

 

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But, you are thinking, wasn’t the inflation rate a lot higher then?  Well, it was higher in the years before 1982, but in 1982, 1983 and 1984 the Consumer Price Index went up 3.7%, 4.2% and 3.5% (January 1983 compared to January 1982, and so on). So, the real rate of interest on this CD was quite high.

That rate was atypically high; a 2% real return for a low-risk investment is probably more typical.

So what about now? In 2012, the Consumer Price Index went up 1.6%. Checking the same bank today (now Chase), the 3 year CD rate is 0.15%, substantially below the rate of inflation. So, the real interest rate is negative (and has been negative basically since the Federal Reserve started pumping free money into banks in 2008).

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Hidden transfer of risk

Of course, this is one more way to transfer risk to individuals and households. (Others include the use of 401k or 403b plans instead of defined benefit pensions.)  My parents could save for retirement investing almost entirely in CDs and US Savings Bonds.  The real rate of interest earned wasn’t very high, but was enough.  But with the real rate of return on CDs negative, people are pushed into riskier investments.