Lower interest rates lower savings expectations

CHICAGO

Life without inflation is easier on consumers, taming prices on everything from food and lodging to clothing and heating fuel. It sure can make it tough to find a decent rate of return on their cash, though.

That challenge just got prolonged with the Federal Reserve’s announcement earlier this month that it intends to hold interest rates at a record low for “an extended period.”

While the Fed’s decision strengthens prospects for the economy, it means yields from certificates of deposit (CDs) as well as savings and money-market accounts at banks will remain minuscule, leaving people in a quandary over where to put their money.

“Beyond their retirement accounts, that’s usually the first question we get from clients these days,” said Michael Berardi, managing partner of Boston Hill Advisors in North Andover, Mass. ” ‘What do I do with my cash?’ ”

The short answer: Don’t expect much for now from those traditional cash deposits.

Even the best rates for one-year CDs are currently less than 2 percent, and savings accounts and money-market bank accounts are no better, often less than 1 percent.

Money-market mutual funds, which typically earn higher interest than money in bank accounts, are faring even worse, with an average 12-month total return of 0.25 percent, according to mutual fund data provider iMoneyNet. That’s an all-time low.

Rates of return won’t improve appreciably until the Fed starts to lift short-term interest rates, and pundits don’t see that happening until late 2010 or early 2011.

So if rates aren’t going to go up for an entire year, what should you be doing?

There’s no one-size-fits-all solution - it depends on your circumstances. Proceed cautiously before adding risk to your bread-and-butter savings, however.

Here are some key points to keep in mind in the quest for palatable rates:

1. Keep low rates in perspective

Savers may be tempted to look back longingly on the days when having money sit in the bank and grow could be rewarding. As recently as summer 2008, just before the financial crisis hit full-force, you could earn 5 percent on the best-yielding savings accounts.

What can easily be overlooked is that inflation reached 5 1/2 percent at the same time, so they could have actually have been losing money despite those fat yields.

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