Tuesday, April 26, 2022

Where are the customers' rate increases?

U.S. banks are at it again. Inflation is at its highest level in decades. At the same time, interest rates on deposits at the Fed, Treasury bills, bonds and mortgages are rising rapidly to compensate. Yet banks are still in a holding pattern when it comes to the interest rates they pay to customers on savings accounts, certificates of deposit (CDs), and interest-checking accounts.

Here's the chart, which uses FDIC data from FRED. Note how customer deposit rates (in red) have hardly budged, despite the Fed beginning to raise rates last summer. This same sluggishness also occurred in 2015, the last time the Fed began to hike rates. Banks didn't boost savings accounts rates till two years later, in 2017!


Historically, rates on CDs seem a little more responsive. But they're still sluggish. The average 6-month CD still only yields a scrawny 0.09%, whereas the yield on a 6-month Treasury bill is now at 1.4%.

This stickiness wouldn't be such a big deal if banks were also slow to reduce interest rates on customers' accounts win some, lose some, right? But take a look at what happened when the Fed began to cut rates in mid-2019. Banks didn't hold off. They immediately started to pass lower rates on to their customers, and only became more aggressive when COVID hit in March 2020.

So for bank depositors, it's all lose. U.S. banks are slow to increase rates on checking accounts, CDs, and savings accounts, but quick to reduce them. I wrote about this sad lack of symmetry back in 2020. Do go back and read it.

This observation isn't something that economists have ignored. In a paper entitled "Sticky Deposits", Federal Reserve economists John Driscoll & Ruth Judson found that rates are "downwards-flexible and upwards-sticky." This stickiness has consequences for regular Americans. If rate stickiness didn't exist, the authors estimate that U.S. depositors would have received as much as $100 billion more in interest per year!


  1. And bank economists advocate higher interest rates even as their institutions are speculating and making profits when rates rise.


    "The private banking economists that are continually wheeled out in the media to comment on prospective interest obviously talk up interest rate rises because their organisations benefit, which poses the question as to why they are used in this way and held out as independent authorities."

  2. I would love to see some analysis on whether credit unions (and similar non-profit institutions) are as "upwards-sticky" in their savings rates as their for-profit counterparts.

    I just got the following email from one of my CU's, and it reminded me of this post.

    "Rates on the rise

    "We raised our interest rate on savings accounts as of April 1, and we’ve already increased our certificates rates three times this year. You can count on Alliant to act quickly to raise our rates whenever it’s financially feasible.

    "Our employees are Alliant members too, so we love savings rate increases just as much as you do! We expect to have more good news on that front throughout the rest of the year, so watch your inbox."

    1. That's a great question and I'd love to see the answer, too.