Bank CD rates and inflation

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nisiprius
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Bank CD rates and inflation

Post by nisiprius »

I've commented before that in real life, cashlike investments, like good, competitive bank accounts or Treasury bills have, in fact, tended to keep pace with inflation, often eking out a small real return.

People sometimes play games with the definition of "cash." The word "cash" can mean physical currency, in which the number of dollars never changes. But more often, we use "cash" to refer to interest-bearing deposits or accounts.

The picture is complicated by periods of time when the rates on bank accounts (Regulation Q) and Treasury bills (1942-1951) were capped by regulations. It happened, it's part of history, and shouldn't be swept under the rug--but it should be noted.

Anyway, I found that the St. Louis Fed has a database of 3-Month or 90-day Rates and Yields: Certificates of Deposit for the United States, back to 1964. (I am not sure exactly how these correspond to anything consumers can buy at a brick-and-mortar bank). I thought it would be instructive to chart it. This chart is inflation-adjusted. It shows 3-month CDs, Treasury bills, and literal non-interest-bearing cash.

Certainly the behavior of bank accounts has been nothing to write home about They have in fact been losing money to inflation for about a decade. The red curve show the effect of inflation on a literal, unchanging sum of $10,000. Some writers implicitly use this when discussing the effect of inflation on "cash." But if cash means money in the bank, the real (pun) situation is nowhere near as bleak as the red curve suggests.

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Firefly80
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Re: Bank CD rates and inflation

Post by Firefly80 »

nisiprius wrote: Wed Jun 15, 2022 9:37 am I've commented before that in real life, cashlike investments, like good, competitive bank accounts or Treasury bills have, in fact, tended to keep pace with inflation, often eking out a small real return.

People sometimes play games with the definition of "cash." The word "cash" can mean physical currency, in which the number of dollars never changes. But more often, we use "cash" to refer to interest-bearing deposits or accounts.

The picture is complicated by periods of time when the rates on bank accounts (Regulation Q) and Treasury bills (1942-1951) were capped by regulations. It happened, it's part of history, and shouldn't be swept under the rug--but it should be noted.

Anyway, I found that the St. Louis Fed has a database of 3-Month or 90-day Rates and Yields: Certificates of Deposit for the United States, back to 1964. (I am not sure exactly how these correspond to anything consumers can buy at a brick-and-mortar bank). I thought it would be instructive to chart it. This chart is inflation-adjusted. It shows 3-month CDs, Treasury bills, and literal non-interest-bearing cash.

Certainly the behavior of bank accounts has been nothing to write home about They have in fact been losing money to inflation for about a decade. The red curve show the effect of inflation on a literal, unchanging sum of $10,000. Some writers implicitly use this when discussing the effect of inflation on "cash." But if cash means money in the bank, the real (pun) situation is nowhere near as bleak as the red curve suggests.

Image

So I think think is highly dependent on fed policy, as you noted From 2008 - 2022 a 30 day perpertual t-bill has had a real return of about -2% per year (cumulative -28% over 14 years). That's a very bad and very long period of not keeping up.

If the fed decides to impose a inflation tax to stimulate the economy as it did after 2008 by keeping the interest rate below the inflation rate for years on end it really hurts savers.

In your example there were decades that the fed kept interest rates above the inflation rate which helped savers get a real return but it's no guarantee going forward.
Kudu
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Re: Bank CD rates and inflation

Post by Kudu »

This is eye-opening. At the risk of sounding argumentative (I don’t mean to) that graph does tell two very different stories pre- and post-2008, or even 2002.
ekid
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Re: Bank CD rates and inflation

Post by ekid »

I don't understand that left "X" scale, labeled "growth."

Shouldn't it be more consistent? (with 30,000 exactly three time the distance from 10,000, and 15,000 exactly in the middle?
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Re: Bank CD rates and inflation

Post by 22twain »

It's a logarithmic scale. Note that the distance from $1,000 to $2,000 is the same as from $2,000 to $4,000, and from $10,000 to $20,000, etc.

Equal distances correspond to equal percentage changes, in my examples a 100% increase, or going the other way, a 50% decrease.
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Re: Bank CD rates and inflation

Post by Call_Me_Op »

ekid wrote: Wed Jun 15, 2022 11:48 am I don't understand that left "X" scale, labeled "growth."

Shouldn't it be more consistent? (with 30,000 exactly three time the distance from 10,000, and 15,000 exactly in the middle?
You mean "Y" scale - and no, it's logarithmic not linear.
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seajay
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Re: Bank CD rates and inflation

Post by seajay »

Not a fan of depository systems myself, where your cash-deposit becomes the banks money, no longer yours, just in effect a bank IOU record entry, where they are free to do what they like with that money, within the limits of regulation. Prefer custodial banking instead, where whatever I deposit remains mine, the bank just providing the physical security around that. More so in a low/zero interest rate era.
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