Despite the drop in interest rates, CD rates are going up as banks try to attract more deposits to shore up their own financial situation.
WASHINGTON — It’s hard to find an investment you can trust these days.
So consider the humble certificate of deposit.
To jittery consumers, the CD suddenly looks like more than just a good place to park birthday checks from Grandma. Banks are busy trying to one-up each other on rates to land customers.
Even the highest rates may not be eye-popping, but a 4 percent return over the next six months looks lucrative when you consider the battering that stocks are taking almost every day.
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“It’s a perfect marriage at a time when the stock market has been very volatile and the economy is weakening,” said Greg McBride, senior analyst for Bankrate.com, which offers consumers information on financial rates.
CDs are deposits on which banks pay a fixed rate of interest for a fixed period of time starting at six months. They are federally insured up to $250,000.
The financial crisis has created something of an anomaly in the CD market. Banks are pushing up CD rates even though the Federal Reserve has been cutting short-term interest rates.
In normal times, CD rates rise and fall in tandem with short-term rates.
But because banks are so desperate for deposits to bolster their finances — and in the long run to loosen up credit — they are willing to offer attractive rates, even if it means smaller profits.
The CD market started heating up about six months ago, said Nancy Davis, senior vice president and director of marketing for Acacia Federal Savings Bank, which has a branch in Falls Church, Va., where CDs have been a bedrock of its business for 23 years.
But the scramble for customers really started in recent weeks.
“There’s a lot more competition for the CD business, particularly from the larger commercial banks such as Wachovia, who in the past didn’t compete for the CD business,” Davis said.
“Certainly the market is competitive,” said Ferris Morrison, a spokeswoman for Wachovia, based in Charlotte, N.C. “We see (CDs) as one tool to drive additional customer acquisitions.”
Consumers still should invest in accordance with their goals and time horizon. If you’re 50 years old, saving for retirement and nervous about volatility in the market, you may want to diversify and put some of your holdings in cash — but not all, financial advisers say.
You need to keep some money in stocks for long-term appreciation and to benefit from the eventual rebound from the current malaise.
“We laugh when we see people on CNBC say the market is going to be up, down or sideways,” said Herbert Hopwood III, president of Hopwood Financial Services in Great Falls, Va. “With interest rates, you don’t know either. A lot of it is not in our control.”