Pent-up Demand – For CDs?
Certificates of deposit (CDs) have been uninteresting for some time now. With short-term interest rates so low, there has been little incentive for savers and investors to lock up their money. As the Federal Reserve raises rates, that picture could change, with demand once again picking up.
The graph below shows the interest rates for 6-month CDs compared to the total amount of small (under $100,000) time deposits (excluding IRA and Keogh accounts). Note that each rate rise has produced time deposit growth.
Time deposits are good for financial institutions. Savers and investors must commit to a time period, meaning the institutions are assured of having the money available for a period of time. That’s why the institutions are usually willing to pay a higher interest rate than for regular savings accounts.
Why call the demand “pent-up?” Like certain consumer purchases that, when postponed, accumulate (e.g., autos), so, too, do financial “purchases.” For various reasons, people can hold off putting money into an investment because they are waiting for the right time.
So, as the Fed allows short-term rates to rise, we will likely see rates for CDs increase, leading to money flows into them, benefiting both savers/investors and the financial institutions.
