Despite the Fed’s sharp rate hike, most banks won’t pay much interest

Jerome Powell, Governor of the Federal Reserve.

Katie Kramer | CNBC

The Federal Reserve just raised its benchmark interest rate by half a percentage point, its biggest move in more than two decades, as it seeks to tame inflation.

The central bank’s actions mean that at a time of sharply rising prices for everything from food to fuel, the cost of money itself is rising. Borrowers – people looking for mortgages or with credit card debt – will soon be paying higher rates on these loans.

But on the other side of the equation, depositors who keep their savings in banks are not likely to reap the benefits anytime soon. Indeed, measures taken to avert economic catastrophe in 2020 have left the U.S. banking sector awash with deposits, and most lenders have little reason to attract more, analysts say.

“The biggest banks in particular are sitting on a mountain of deposits. The last thing in the world they’re going to do is increase what they’re paying on those deposits,” said Greg McBride, chief financial analyst at Bankrate. .com. “The dominant large franchise banks that have branches and ATMs coast to coast will not be pressured to raise their rates.”

In 2020, the United States released hundreds of billions of dollars in stimulus for small businesses and families, propped up markets with bond-buying programs, and brought rates down to near zero. Much of that money has flowed to banks, which have taken in about $5 trillion in new deposits over the past two years, according to data from the Federal Deposit Insurance Corporation.

At the same time, industry lending did not keep pace, meaning banks had fewer places to deploy cash. Despite paying paltry interest, industry lending margins have been squeezed, hitting a record low last year. The national average figure paid for savings hovered around 0.06%, according to At JPMorgan Chase, the largest US bank by assets, most retail accounts were paying a tiny 0.01% annual percentage yield as of April 29.


In previous rate hike cycles, banks were typically slow to raise the rates paid to depositors, at least initially, to give them time to lend money at higher rates. This dynamic is not new to anyone who follows the industry: in fact, it is the most important factor in the investment case of banks, which tend to benefit from higher lending margins as the rate federal funds increase.

But there is debate among analysts whether the unique aspects of the present moment will force banks to be more responsive to rising rates. The result will have implications for millions of American savers.

Industry deposit beta, a term that measures a bank’s responsiveness to changes in the prevailing rate, is expected to be low ‘for the first few Fed rate hikes’ due to ‘excess liquidity’ in the financial system, said Vivek, a banking analyst at JPMorgan. Juneja said in a May 4 note. (The higher a bank’s deposit beta, the steeper the rates rise.)

But the high rate of hikes expected for this cycle, greater competition from fintech firms and greater rate awareness will result in higher deposit betas than the previous tightening cycle, the Morgan Stanley analyst said. Betsy Graseck, in a March 14 note. This cycle lasted about three years until 2018.

“Consumers will likely be more aware of rate hikes given the faster speed and fintech’s focus on rates as a means of acquiring customers,” Graseck wrote. “This could put pressure on incumbent banks to raise their deposit rates faster.”

Additionally, the Consumer Financial Protection Bureau said it will monitor the industry’s reaction to higher rates this cycle, which will increase pressure on banks.

“Move Your Money”

Another unknown is the impact that the Fed’s so-called quantitative tightening will have on the banks. This is the reverse of central bank bond buying programs; On Wednesday, the Fed confirmed its forecast that it would reduce bond holdings by up to $95 billion a month.

That could slow deposit growth more than banks expect, increasing the chances that they’ll be forced to raise rates this year, Graseck said.

While big lenders like JPMorgan, Bank of America and Wells Fargo aren’t expected to dramatically increase payments anytime soon, online banks and fintech companies, community lenders and credit unions will be more responsive, raising rates. this week, according to McBride. Representatives of the three banks did not immediately comment.

Just as banks view the rates they pay savers as just a business decision, so too should savers, he said.

“Put your money where you’re going to get a better return, that’s the only free lunch in finance,” McBride said. “Moving your money to another federally insured financial institution gives you extra returns without having to take on extra risk.”

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