federal reserve

8 ways the Federal Reserve's interest rate decisions affect your life

Nudging CD rates
Nudging CD rates © iStock

Nudging CD rates

If you rely on interest from certificates of deposit for income, you're probably not too happy with the Fed keeping interest rates at rock bottom.

"Retirees want to live on the interest on their CDs," Reese says. "The Fed determines whether they can do that or not."

CD rates largely follow the short-term interest rates that track the federal funds rate. However, Treasury yields and other macroeconomic factors can influence rates on long-term CDs.

Individuals should focus on the real rate of return on CDs, after inflation is taken into account, says Casey Mervine, a senior financial consultant at Charles Schwab. In the late 1980s, for instance, you could earn double-digit rates on CDs, but with inflation also in the double digits, your actual earnings were much lower due to the erosion of your purchasing power.

Recognize that the Fed's actions are intended to prompt you to invest in higher-yielding bonds and stocks, thereby fueling the economy.

"There's an old adage, 'Don't fight the Fed,'" Mervine says. "When the Fed can keep you from earning anything in safe money, you really have to take some measured risk."

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement

Blog

Greg McBride

Greg McBride: Lay down ARMs?

Don't rule out adjustable-rate mortgages as interest rates rise.  ... Read more

advertisement
Partner Center
advertisement

Connect with us