The Federal Reserve Bank's move last week to raise interest rates again -- the fifth increase this year -- likely will fuel a corresponding surge that has developed: the revival of certificates of deposit.
CDs are making a comeback with Arkansas financial institutions and lenders across the nation promoting the investments to customers, an effort that dried up during the pandemic when interest rates effectively bottomed out at 0%.
Financial institutions have followed the Fed rate increases and raised yields on CDs to a three-year high. "We're going to continue to see rate specials as interest rates rise," said Randy Dennis, president of DD&F Consulting Group, a Little Rock firm that provides a broad range of services to the financial sector.
Lenders are motivated by the need to replenish declining deposits, their primary source of funding to bolster lending activity.
"It seems to be a new trend now for banks and credit unions, to attract deposits, to come out with a CD special," said Ken Tumin, who operates depositaccounts.com, a consumer-friendly site that tracks deposit rates and data nationwide. "It's been a competitive market."
Consumers are responding favorably to the investment bonanza, where rates in a handful of states are running as high as 4% and it's common to find returns of more than 2% offered by Arkansas banks and credit unions.
CDs are a fairly safe-harbor product with a quick return -- they're guaranteed by the Federal Deposit Insurance Corp. -- for investors grappling with a turbulent stock market and threats of recession. The benchmark S&P 500 index is down about 14% for the year and Morgan Stanley is projecting that could fall by another 27% by the end of the year. Inflation, at the same time, has reached a 40-year high.
"There's a huge market and a huge opportunity for customers to access CDs and get a great rate of return," said Joshua Jensen, chief deposit officer at Simmons Bank. "When you compare where we've been with today, we're really at a very high-return rate environment in terms of savings accounts and CDs. Many banks are out there marketing and advertising their product again."
Arkansas Federal Credit Union began offering a special boost CD in March -- when the Fed first raised rates -- that has attracted $43.6 million in CD investments since launch. The 24-month CD gives investors greater flexibility by allowing them to move up to a higher return if interest rates increase during the term of the CD.
"It's been an attractive product for our members," Chief Financial Officer Eric Mangam said. "The rationale behind that is we knew rates were going to go up and we wanted people to begin locking into a 24-month product that allows them to reprice their money. It's a two-year CD that gives flexibility in a rising-rate environment."
The boost CD offered 1% interest in March; that's up to 2% today and likely to continue rising with last week's Fed move and predictions of more increases to come through next year.
Across the board, Arkansas lenders revived promotions over the summer and are reporting favorable responses from investors, whose interest is primarily driven by interest rates.
"We saw an almost immediate response when we first started running the specials," said Cindy Wolfe, chief operating officer at Bank OZK of Little Rock. "The folks who were on the sidelines for CDs are definitely back. The CD market is rate driven ... they're purely in and out with rates."
Promotions are finding success. Arkansas Federal has seen CD investments increase nearly 22% over the past year, rising to $200.5 million, according to Mangam.
CD promotions at Bank OZK and Simmons offer returns ranging from 1.71% for eight months up to 2.55% for 21 months. Attractive offers also are easily found online -- typically at higher rates than in Arkansas -- and investments are fairly simple: there are no added fees or costs for buying CDs outside of Arkansas. Most CDs require at least $500 to $1,000 to open, though some have no minimum deposit requirements.
"Last year it was a challenge to even get 1% and now with rates reaching 4%, it's turning some heads," Tumin said of current CD promotions.
The Fed has increased rates at a blistering pace this year to battle inflation, starting with a 0.25% increase in March that was followed quickly by four other increases -- the latest 0.75% increase approved Wednesday -- that have pushed the federal-funds rate to a range between 3% and 3.25% and have reached the highest level since 2008. That rate was essentially 0% when the year began.
Fed officials also indicated the rate likely will rise by another 1.25 points before the end of the year to a range between 4.25% and 4.5%.
Looking forward, banking conditions are not likely to change soon. A Sept. 19 report from Stephens Inc. cited a nationwide survey of bankers and investors who predicted slowing deposit growth for the remainder of the year.
The Federal Deposit Insurance Corp. reported earlier this month that deposits nationwide fell to $19.563 trillion as of June 30, down from nearly $20 trillion in March. Banks begin reporting third-quarter earnings next month, which will shed more detail on the current environment.
Jacksonville-based First Arkansas Bank & Trust began running promotions a few weeks ago, mostly to offer customers competitive rates and retain deposits at the bank.
"Our customers expect us to respond to market rates in general and that's why we started offering special promotions," Wilson said. "We did do it in response to the rate increases, and like most banks, we're interested in protecting what we have in deposits. We wanted to keep those deposits with us."
Dwindling deposits combined with stronger loan demand create ideal conditions for CD investors.
"We're not going to quit making loans," said AFCU's Mangam, noting that loan growth at the credit union was up 23% from a year ago. "When your loans are continuing to grow, you have to pay a little more in CDs to continue making those loans."
Lenders will continue to tailor their CDs to reflect competitive conditions, meaning investors are likely to see higher yields in coming months, according to Dennis.
"CDs are an easy investment and get more attractive as rates increase," he said. "Banks might not really like it but it's great for consumers."
CORRECTION: First Arkansas Bank & Trust, the Jacksonville-based bank, began promoting certificates of deposit a few weeks ago. An earlier version of this story incorrectly spelled the bank’s name.