In fact, despite the short time-frame (again, just six months), going back almost 50 years ago to 1964, the average short-term CD rate in America was nearly always over 4% annualized. Until recently, the only exception was a brief period from mid-1992 to the beginning of 1994. And even during that period, average CD rates remained above 3%.
In 2000, in response to the crash from the technology-stock bubble, then-Federal Reserve Chairman Greenspan sharply lowered short-term interest rates, which combined with the economic slowdown, resulted in a sharp decline of average CD rates from over 6% at the end of 2000 to the 1%-2% range for most of the period from 2002 to 2004.
The growing real-estate bubble, and the Federal Reserve, allowed interest rates to rise again for a few more years until that bubble popped and the financial downturn ensued. At that point, the Fed threw out all the stops and lowered interest rates to the floor. And has kept them there.
Because of the scale, it's hard to tell from the chart just how low average CD rates have been over the past 4 years. I'll clarify a bit. Starting in the second half of 2009, up until now, average 6-month CD rates have never been above 0.75%. They have averaged 0.40% during this time. To put that in perspective, that means that (with the average interest rate during the last four years) if I parted with 10,000 of my dollars and drove them down to the bank, I would get a CD whereby the bank agrees to give me my $10,000 back in six months, along with a fresh twenty dollar bill (half of a year's interest at 0.40% annualized).
Or if it was a modest $1,000 that I was intent on "investing", I would be rewarded with two extra dollars at the end of the six months.
This reality highlights the current reality of risk versus reward for investors. Those wishing to save in a safe and reliable way are going to have a very difficult time doing so in light of such artificially low interest rates. In years past, a saver with $100,000 might earn in the neighborhood of $6,000 to $8,000 a year invested in stable investments like a short-term CD. A nice supplemental income for a retiree. But based on the most recent data (June, 2013), that same $100,000 investment would generate about $260 in extra interest over a full-year, not counting any fees or the taxes that will be paid on it. This is an income level less than a twentieth of what could be earned at about any point up until the year 2000.
In response, the alternative course that so many investors have taken, often unwilling, or out of necessity, is putting that money in the stock market, hoping and praying that the bubble won't burst again and that they don't lose a third or half of their investment.
But this is a dangerous course. Despite the Federal Reserve's levitation of the stock market, Bear Markets are always right around the corner, ready to snare the unsuspecting. Despite the paltry interest rates that bank savings (or your mattress) provide, you should not be putting money in the stock market that you'll need with a few years. You have to ask yourself how you would handle a drop in the stock market, of say, 35%. Would your investments be sufficiently diversified to withstand that decline? Or would you panic at some point of that decline and sell because you "need the money".
Stock market inclines do not eliminate stock market risk, they increase it. If you could not watch your investments fall significantly, then you should not have that pool of money invested there. It is unfortunate that safe investments, traditional investment havens like Certificates of Deposit, do not provide a real and meaningful interest rate.
That will probably be the case for quite a while longer. Recently the current chairman of the Federal Reserve, Bernanke, clarified that the Fed has no intention of ending their Zero Interest Rate Policy (or ZIRP) any time in the near future. It may continue for many years. Japan's very low interest rates have continued for more than two decades since the transformation of a robust economy to a stagnant one. The U.S. seems to want to follow the same course, despite the obvious danger that it gives to savers.
By the way, besides Bernanke's pronouncements of his devotion to ultra-low interest rates, U.S. government finances alone dictate that it's nearly a certainty that interest rates will not rise to more normal levels. Perhaps ever. I will explain why next time.