Even though Fed chief Janet Yellen has raised its target federal funds rate four times since December 2015 — with a possible fifth increase happening Wednesday — don’t expect interest on your savings deposits to rise any time soon.
In part, that’s because banks just don’t need your money.
As Lance Pan points out in a recent report by Capital Advisors Group, among jumbo deposits (greater than $100,000), the money market rate has risen 0.01 percent, to 0.12 percent, and the one-month certificate of deposit (CD) rate was unchanged at 0.07 percent, while the three-month CD rate rose only 0.02 percent, to 0.11 percent, in the period since the Fed began tightening, raising the Fed funds target rate by an overall 1 percent.
“Despite the 1 percent total increase in the Fed funds over the last 19 months, money market and short-term CD rates barely budged,” Pan writes. “Historically, these rates tended to rise with the Fed funds rate, sometimes exceeding the benchmark rate increases.”
Since the Great Recession, bank reserves have gone from just over $8 billion at the end of 2007 to a peak of $2.8 trillion in late 2014.
Currently, even as speculation swirls as to the timing of possible Fed divestment of these assets, bank reserves still stand at $2.2 trillion (as of June 30), abundant reserves that “provide sufficient liquidity, and this lessens the need for banks to pay higher rates on deposits,” Pan writes.
Analyst Chris McGratty of Keefe Bruyette & Woods agrees, but stresses that this is only part of the story. “To the extent that banks are brimming with liquidity, they can allow deposits to flow out,” he says.
At the same time, the lag in interest rates offered to depositors also reflects the timidity of the current round of tightening. “We haven’t had a tightening cycle since 2004, and a lot has changed in 13 to 14 years.”
McGratty and other bank industry analysts expect this situation to correct itself and restore incentives (and opportunities) for savings.
“Over the next couple of years, there will be a migration away from noninterest-bearing deposits,” Pan predicts.
By Ed Zwirn