Fear of Higher Inflation Prompts Short-Term CD Abandonment

Credit union members and bank customers were clearly anticipating that inflation would rise in late 2009 or early 2010 due to the massive liquidity in the market. That reduced the appeal of locking in short-term deposits at relatively low interest rates. It’s important to note that only short-term deposits (up to one year) are on the decline. Anticipating higher interest rates, credit union members and bank customers continue to shy away from short-term deposits. They realize that as long as deposit rates remain low, the net return on their money is going to stay in negative territory when adjusted for inflation.

Deposits of more than one year showed a modest gain in balances, which could mean that consumers expect the Federal Reserve to increase the Fed funds rate at some point, which would push deposit rates back up and inflation rates down. Thus, CDs that will mature in a year or two, when deposit rates are higher and inflation is lower, are likely to yield a positive return.