Get the Best and Safest Rate on Your Savings

by Fred Cederholm
The housing/real estate bubble, ballooning credit card debt, and home equity cash-outs of celestial proportions have set the stage for big trouble ahead. Avoid it by switching to time deposits and US treasury securities. Here's how to navigate the best deal.
I’ve been thinking about rates; actually, I’ve been thinking about perspectives, background, time-deposit investments, negotiations, indifference, and Treasury Direct. Last week, I laid foundation in "base rate definitions" because the terms were confusing, and there was too much to cover in one column. In fact, what was to become two columns now will be three!

You see, while working on this part, it became apparent that there are two perspectives from which one views the interest rate roller coaster of these past fifteen years. Savers and borrowers diametrically oppose one another in this regard. Whatever trend (up or down) benefits one group at the same time puts the screws to the other.

From July 13, 1990 to September 4, 1992, Greenspan and Company took the Fed Funds rate from 8% to 3% via 18 rate decreases. February 4, 1992 began seven increases that took this benchmark rate from 3.25% to 6% on February 1, 1995. From July 6, 1995 to May 16, 2000, six decreases and seven increases fluttered the rate in a 4.75 % to 6.5% range. January 3, 2001 to June 25, 2003 saw thirteen decreases, bringing the rate to 1%--where it languished until June 30, 2004, when the recent stream of eleven consecutive quarter-percent (.25%) increases brought the Fed Funds rate to 3.75% on September 20, 2005. A rate range between 3.75% and 4.25% is considered neutral. Did this history of rate fluctuations really smooth out the crests/ troughs of the US economy, regulate inflation, and/or deflate and re-fluff the stock market?

The cheap money/ liquidity of a Fed Funds rate of 1 to 2% for almost three years spawned the three ticking time bombs of a housing/real estate bubble, a ballooning credit card debt, and home equity cash-outs of celestial proportions. These years have also seen the US budget deficit, the national debt, and the US current (trade) deficit soar to record heights. (This will be the focus my next column.) Remember that Uncle $ugar was already the galaxy’s largest borrower. And... he sets the rates on his own financing via the Fed. "How conveeeeenient!"

While borrowers and spenders have "prospered" of late, savers (those who try to live within their means and like me do not invest in equity securities, but choose time deposits and/or US treasury securities instead) have taken it in a manner which my Lutheran upbringing and decency precludes me from stating. Our choice has been to endure the rates, or bite the bullet and shift to equities. I rode the rate downtrend at six months intervals until I locked in a 3.9% rate for 36 months on a majority of my holdings in October 2002. At that time, I didn’t want to go that far out, but I’m glad I did. (Who knew or who knows?) Now, I’m back shopping the rate market.

Financial institutions immediately ride the rates on time deposits downward in sync with the Fed Funds rate, but they lag in making the quarter-point up-ticks by more than eight increases. It’s kind of like the gas prices at the pump--only in reverse.

I thought with eleven consecutive rate increases from the Open Market Committee and more anticipated, the current short-term bank rates would be at, or near, what I have going through the end of this month--but they're not even close! The financial institutions ride the rates (on time deposits) downward in sync with the Fed Funds rate immediately, but I found they seem lagging the recent quarter-point up-ticks by more than eight increases. It’s kind of like the gas prices at the pump--only in reverse; that is, unless you are on the borrowing side of the equation. Then, they’re in perfect sync with the oil companies rising with the "tide’ and receding when they get to it!

The week before my certificates mature, I’ll visit a number of local institutions. I won’t deposit out of region: I learned from my three years as a forensic accountant working for the FDIC/RTC on the S&L disaster that it is comforting to drive by an institution’s facilities and see the lights on. The negotiations on rates will begin in earnest. I will use the Treasury’s Tuesday auction results as my back-up trump card. Last week, the investment rate per cent was 4.002 for a 182-DAY investment. The Fed should have one more quarter-point rise before I "mature."

Since Illinois State income taxes are 3% and interest on federal securities is exempt from state taxes, I take 103% of the last auction rate as my indifference point. If they will match that hurdle rate (or come very close), the money will stay; if not, I’ll use the appropriate Treasury Direct application forms. For the cost of a postage stamp and a personal check, or using the online option and click..., I’m happy and set for six more months.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2005 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at

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This story was published on October 10, 2005.