People with money in the bank soon may help foot the bill to stabilize Wall Street.
Many investment experts 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 could see their first significant fall in more than three years.
Historically, banks and savings institutions have not wasted much time in paring deposit rates once the Fed trims its key rate, said Ray Montague, manager of deposit customer services for 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. "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, known as the federal funds rate, from 6.5 percent to a generational low of 1 percent 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 percent four years ago this month, according to Informa Research.
Beginning in mid-2004, the Fed began to tighten credit. Policymakers raised their key rate by a quarter of a percentage point every six weeks or so, reaching 5.25 percent by June 2006. The Fed then went on hold.
Nationwide, the average yield on one-year CDs of at least $25,000 now is about 4.17 percent, Informa Research said. That yield has mostly held steady for the past 12 months.
The Fed faces a difficult decision with interest rates because policymakers are not sure whether the summer turmoil in financial markets will have a lasting effect on the economy.
Since June, rising home loan delinquencies have caused investors to flee mortgage-backed bonds.
That has fueled a general aversion to risk-taking that has caused many banks and investors to pull back from lending money, sparking a credit crunch.
By cutting its main short-term rate, the Fed could bolster the financial system and give banks more confidence to lend.
Given the level of fear in the marketplace, "banks are not going to do much lending without a reduction in their cost of funds," said Brian Bethune, an economist at Global Insight Inc.
For now, many economists expect the Fed to drop its key rate to 5 percent from 5.25 percent when policymakers meet Sept. 18, and that one or two additional quarter-point cuts are probable by year-end if the crunch does not show signs of abating quickly.
Any drop in the Fed's rate almost certainly would translate into lower rates on bank deposits. Interest yields on money market mutual funds, which invest in short-term corporate and government IOUs, also would be expected to decline.
Investors in money market funds that buy only government IOUs have seen a sharp decline in their yields. That is because the credit crunch has caused some investors to rush into short-term Treasury securities as a haven.
As demand has surged for those IOUs, the Treasury has had to pay lower interest to attract buyers.
Still, it is not certain that the Fed will cut rates at all, some analysts warn. And even if the central bank does act, the decline could be temporary. If the economy picks up, the Fed could be raising rates next year.
Even so, McBride at Bank rate.com said savers should consider shifting at least some of their cash in short-term accounts into longer-term CDs, such as one-year issues, on the chance that rates have peaked.
And with federal deposit insurance coverage the same everywhere, up to $100,000 per account and $250,000 for individual retirement accounts, analysts advise shopping for the highest yields.
Tom Petruno writes for the Los Angeles Times.