Higher interest rates have made borrowers scream for the past three years, but they’ve been pretty good for savers. Retirees, and others who need income from their investments with little or no risk, have suddenly been getting interest on their deposits again.
Bonds — Treasury and corporate — have been offering semi-respectable yields.
And lifetime annuities — under-owned, but there’s another story — have been paying out much better rates for those who want to convert some of their 401(k) or IRA into a traditional pension.
To which I can only say: Sorry, folks — but grab ‘em while you still can.
After watching Federal Reserve Chairman Jerome Powell’s press conference Wednesday, I figure these rates aren’t going to last much longer.
Powell is looking ahead to cutting interest rates, probably by May. He’s already happy with the way the economy and inflationary pressures have been moving. He says the numbers have been good — “very good,” even — for the past six months. He just wants to see more of the same in the months ahead before he can be “comfortable” about starting to cut rates.
The market Wednesday was disappointed to hear that a March rate cut was all but ruled out. Wall Street has been wrong on interest rates all the way through this entire cycle, since inflation and rates began to rise three years ago. At every juncture the market has seen rates peaking too soon and coming down too soon. Coming into this week it was wrong again.
But that’s Wall Street news. For those of us on Main Street, the direction is pretty clear. Powell said current rates were at their peak for the economic cycle, at 5% to 5.25%. The past six months’ inflation data had been “good,” “very good,” and “low enough.” And he just wants to see more of the same, to make sure he doesn’t cut too soon and get caught unawares.
“We just want to see more evidence that sort of confirms what we think we’re seeing, and gives us confidence we’re on a stable path down to 2% inflation,” he said.
Yes, he all but ruled out a rate cut at the next meeting in March. But not in May.
Where does this leave savers?
You can still find bank Certificates of Deposit paying 5% annual interest, but only for six months. The best rates on one-year CDs are now about 4.8%. On CDs lasting 18 months or two years, you’re looking at around 4.5%. The best deals are to be found through brokerage accounts, and change hourly.
The CDs you want are “call protected.” Otherwise the bank can pay you that juicy high teaser rate for one month, then close (or “call”) the CD. Your money will go back in your checking account and you’ll have to buy something else.
Low-risk bond funds, such as those that invest in intermediate-term U.S. Treasury bonds and investment grade corporate bonds, are paying 4.5% or more: For example Vanguard Intermediate-Term Bond ETF
BIV,
which is a mix of Treasurys and investment grade corporates, is yielding 4.5%. The equivalent that owns only corporates, Vanguard Intermediate-Term Corporate Bond ETF
VCIT,
yields 5.1%.
Meanwhile annuity rates have started to come down from the excellent rates MarketWatch reported here in November.
Annuities convert a lump sum to a pension. Insurance companies take your money, then pay you a guaranteed monthly income for life, whether you live for one month or 40 years. (At the end the money is gone.)
Back in November, a 65-year-old man with $1 million could have bought lifetime income of $77,000 a year by purchasing an immediate (income) annuity. Today, according to data from online brokerage immediateannuities.com, he’d get $74,500. The figures for a 65-year-old woman have come down more modestly, from $73,000 to $72,000.
But if Powell is right, and we are now on track for lower inflation and lower interest rates, these probably have a lot further to fall.
