Are you waiting for 8% on your savings?

Two retirees recently told me that they are waiting for 8% before they move their nest egg out of the bank. They both mentioned articles they had read in the newspaper saying the government was going to keep increasing interest rates until inflation was under control.

I made sure to read the article they had read a few days earlier. They were right- the Chairman of the Federal Reserve did say that taming inflation was their #1 priority, even if it meant people losing their jobs as the economy shrunk in response.

But how did both retirees mention to me that they wanted to wait for 8%?

In the newspaper article there was a reference to past periods of inflation where the Federal Reserve had to increase interest rates to as high as 8%.

From that historical reference both retirees drew the conclusion that an 8% bank CD or bond was right around the corner. Probably not going to happen this time.

I see two big reasons why 8% savings and bond yields are not going to happen.

The first reason is that things are different today than when the Federal Reserve raised rates to 8%. That happened in a time when interest rates were already much higher.

Today the Federal Reserve is working with interest rates that started below 2% prior to their first-rate increase. When rates climbed to 8%, the initial starting rate was closer to 5%.

The second reason we won't see rates near 8% is that the Federal Reserve won't allow it to happen. Every week our federal government borrows money by selling bonds. The government wants to borrow money as cheaply as possible. 8% is more than they want to pay.

Rates will go a little higher, but when the coming recession arrives, interest rates will fall again.

The "sweet spot" today for interest rates is 3 to 5-year maturities. Instead of earning less than 1% in savings, rates of 3.5% to 4.5% guaranteed are available right now.