With the Fed's Wednesday projection to hold the federal funds rate between zero percent and 0.25 percent through late 2014, rates on savings vehicles, such as CDs, savings and money market accounts, will stay in a slump.
Short versus long-term
No significant rate movement is expected this year, but economic events may influence longer-term CD rates in a positive direction.
Very short maturities, however, will likely remain stagnant for the duration of 2012.
Through July, rates on short-term maturities will likely stay within a tight range, "though upticking slightly toward midyear," says Timothy Speiss, partner-in-charge of the personal wealth advisers group and vice president of EisnerAmper Wealth Planning in New York City.
Longer-term maturities will likely follow the same path, but they may be buoyed somewhat by economic events throughout the year. One that may prod rates upward is the end of Operation Twist, an easing program instituted by the Fed in November to push long-term rates down. The program will last through June 2012.
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Other forces are working to keep interest rates low, including the European debt crisis. That impact may be mitigated with some time as people feel comfortable moving out of the safety of Treasuries.
"It is unlikely that the European crisis will be the top story for the entire year, so as that fades from the headlines, you should get more risk-taking and people selling longer-term issues again that may push rates a little higher," says Brian Rehling, chief fixed-income strategist with Wells Fargo Advisors' Advisory Services Group. "As well, we still expect growth to be positive in the U.S. next year, and that should cause rates to edge up next year."
Will inflation run away with CD rates?
While any northward shift in CD rates will be encouraging, headway will be measured basis point by basis point. A basis point is one-hundredth of 1 percentage point.
No significant movement will be seen until inflation heats up and unemployment goes down.
"The good news is that the same broad economic forces that are keeping interest rates very low -- the intense weakness of the economy -- are also keeping inflation very low," says Bill Hampel, senior vice president of research and policy analysis and chief economist at the Credit Union National Association.
"It's very unlikely that we'll have a burst of inflation before CD rates rise. If inflation did go way up, it would be because the economy would be going faster and interest rates would be rising. It is most likely that interest rates will start rising before inflation does," says Hampel.
Tips for CD investors for 2012
This may seem familiar, but balancing the need for yield with safety will be the name of the game in the coming year.
There are only two ways to increase yield: Buy longer maturities, or go further down the credit-quality ladder. The risk inherent in longer maturities lies in interest rate changes, specifically being wrong and long when rates go up. Investors don't want to be locked into a low-rate CD when rates go up.
Bonds further down the credit scale, such as municipal, corporate and high-yield bonds, in that order, may come with some risk to principal in addition to interest rate risk.
"That is really what we are recommending for next year -- to at least take a little bit more exposure down the credit spectrum -- especially if you need the income and the yield," says Rehling.
Though they are riskier than CDs, savers may want to consider small allocations to high-yield preferred securities and corporate bonds. "If it is within their risk tolerances and represents a modest amount of their overall portfolio, it is probably a good strategy to add yield, and we think those sectors are poised to perform pretty well next year," Rehling says.
Like last year, 2012 will likely be fraught with uncertainty. With no definitive answers, the best course of action for CD investors is to stick to the short end of the yield curve and diversify their savings to combat an unknowable future.