The Fed policy cost depositors more than $120 billion in purchasing power in the 12-month period ending in March, according to MoneyRates.com, an online site that helps users find the highest rates on their savings. Over the last four years, the lost buying power comes to $635 billion.
Using the $8.8 trillion on deposit in U.S. banks at the end of the first quarter in 2012, MoneyRates.com calculated the interest that would be earned on that amount for the year using monthly average money market rates from the Federal Deposit Insurance Corp. The value of the deposits, plus that interest, was adjusted for inflation to come up with the total change in purchasing power.
Because people aren't earning enough interest to match or stay ahead of inflation, they are losing buying power. This means that when prices rise, they can't buy the same goods tomorrow with their saved cash.
"The Fed's monetary policy is not a cost-free tactic," Richard Barrington, CFA, senior financial analyst at MoneyRates.com, said in an interview. "Savers are paying for trying to jump-start the economy. The irony is we had a financial crisis that was caused by too much borrowing. Borrowers committed the crime and the savers are doing the time."
So what now?
Until financial institutions begin to pay more for deposits, you need to be extra diligent in shopping around for the best rates. "They are low but not all equally low," Barrington said. "Look for the best of a bad situation in terms of rates."
Try online banks, which have been having a price war over the last six months trying to woo depositors, he said. But first double-check that the institution is FDIC-insured.
Don't lock into long-term CDs. It used to be that you could get a decent rate on a five-year certificate. Not anymore. As of May 20, the FDIC was showing the national average rate for a 60-month CD as 0.74 percent. That's only marginally better than the 0.21 percent rate for a 12-month CD. "It's a good time to keep your CDs fairly short," Barrington said. By buying shorter-term CDs, you can reinvest your money should rates rise.