THE United States economy is slowing and interest rates are moving downward.
But investors are still pouring money into bank certificates of deposit (CDs) and money-market accounts -- despite frequent criticism from consumer groups about the relatively low rates of return.
In terms of long-range financial performance, stocks and bonds consistently outperform bank CDs and money-market accounts.
At present, the average yield on a one-year bank certificate of deposit is 5.68 percent and the highest yields about 6.66 percent, says Hugo Ottolenghi, editorial director of Bank Rate Monitor, a weekly financial journal in North Palm Beach, Fla. Those returns beat the inflation rate of about 3 percent.
Certificates with maturities of five years have an average yield of 6.40 percent. In February, they got as high as 6.84 percent.
Currently, Americans have plunked about $800 billion into bank CDs, notes the Federal Reserve. New monies going into certificates had tapered off in late 1993 and early 1994, when interest rates fell.
But after the Fed reversed policy by raising interest rates in February 1994, the first of seven rate hikes, new money began to move back into CDs.
Banks love CDs because they provide relatively low-cost funds. If interest rates are rising, the interest the banks pay on them climbs more slowly than the rates they charge on loans to businesses and individuals. As this ''spread'' between deposits and loans widens, bank profits grow.
Why buy a bank CD at all?
''The CD is a bank deposit insured by the federal government up to $100,000 and earns an announced set rate of interest,'' says a bank officer with Emigrant Savings Bank in New York. CDs, he adds, are ''convenient to open.''
CDs vs. Treasury securities
But James Fraser, who heads up Fraser Management Associates, in Burlington, Vt., an advisory firm, says most people would be better off buying US Treasury securities rather than bank CDs. The Treasury securities have as much ''safety'' as the federally insured bank certificates. And, he says, they may pay slightly higher interest.
Nonetheless, Mr. Fraser says, conservative investors who prefer dealing with their local bank, or who live in areas without a lot of alternative investment offices, may find bank CDs attractive.
Experts stress that if you decide to buy a CD, it is best to shop around for the highest possible interest rates. Check out advertisements in newspapers from other cities. Most banks will let you open a CD through the mail.
A depositor needs to be alert to potential penalties. In the case of an 18-month CD from Emigrant Savings Bank in New York, for example, the account requires a minimum deposit of $1,000 and pays a yield of 6.50 percent. If you cash in the CD before the maturity date, there is a penalty equivalent to 120 days of interest earnings.
Higher yields with brokerd CDs
Some brokerage houses also sell ''brokered CDs,'' which can pay higher yields. The brokerage commission is included in the transaction cost. A depositor might be able to save commission charges by buying the same CD directly from the bank.
Finally, experts say one should be wary of instruments that look like CDs, but are not the real McCoy. These are securities called ''thrift certificates'' or ''investment certificates.'' Since these are not ''bank deposits'' they may not carry federal insurance protection.
The old adage applies: If the advertised interest rate is extraordinarily high, this may suggest a problem with the instrument, or the issuer. The issuer may be unable to raise funds locally for some adverse reason.
Money-market accounts are similar to bank CDs in that they are conservative investments treated somewhat like cash deposits -- but with check-writing privileges.
Usually there are restrictions as to required minimum balances and the number and amount of checks that can be written on the accounts. The accounts are available from banks and mutual funds.
Many investors put some savings into money-market accounts as a sort of ''holding'' action -- until the funds are withdrawn for investments elsewhere.
Bank money-market accounts are usually insured up to $100,000. Money-market mutual funds are not federally insured, but typically pay higher interest rates than bank money funds.
For the week ending May 10, assets in money-market mutual funds totaled $657 billion, according to the Investment Company Institute in Washington.
''Money-market [mutual fund] accounts are doing pretty decently right now,'' says Ralph Norton, managing editor of Money Fund Report, published by IBC/Donoghue Inc., a publishing company in Ashland, Mass.
The average yield on a taxable fund was about 5.12 percent at the beginning of 1995, Mr. Norton says. The average yield had risen to around 5.71 percent by late February. Today, it is around 5.52 percent. Norton expects the yield to stay at about the current level for the next few months.