People with money in the bank may soon help foot the bill to stabilize Wall Street.
Many investment pros are betting that the Federal Reserve will cut its benchmark short-term interest rate this month to ease the credit crunch that has bedeviled financial markets.
If that happens, rates on bank savings accounts and certificates of deposit also could see their first significant fall in more than three years.
Historically, banks and savings institutions haven't wasted much time in paring deposit rates once the Fed trims its key rate, said Ray Montague, manager of deposit customer services for Calabasas-based Informa Research Services Inc., which tracks savings rates.
"Banks usually are really fast to cut rates and slow to raise," he said.
Some experts are advising people to lock in longer-term certificates of deposit soon, at least with a portion of their savings, in case rates begin to slide.
"Locking in a CD is particularly attractive now," said Greg McBride, senior analyst at Bankrate.com in North Palm Beach, Fla. "The yields haven't yet reflected the idea of a Fed rate cut."
There's a lot at stake. Savers have more than $5 trillion in bank savings accounts and CDs nationwide, up from $2.7 trillion at the start of the decade. Many older Americans, in particular, live partly off the interest they earn on bank deposits.
Those deposits have risen faster than assets in stock mutual funds since 1999, which may demonstrate that many Americans have been relatively conservative with their nest eggs.
Savers suffered from 2001 to mid-2003 as the Fed slashed its benchmark rate, the so-called federal funds rate, from 6.5% to a generational low of 1%, in an effort to bolster the economy.
It was a great time for borrowers, but at savers' expense. The average annualized yield on one-year CDs nationwide was just slightly above 1% four years ago this month, according to Informa Research.
Beginning in mid-2004, the Fed began to tighten credit, but slowly. Policymakers raised their key rate by a quarter of a percentage point every six weeks or so, reaching 5.25% by June 2006. The Fed then went on hold.
Nationwide, the average yield on one-year CDs of at least $25,000 now is 4.17%, Informa Research says. That yield has mostly held steady for the last 12 months.
The Fed faces a difficult decision with interest rates, because policymakers aren't sure whether the summer turmoil in financial markets will have a lasting effect on the economy.
