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RightNation.US: Why You Don’t Feel Fed Rate Hikes in Your Bank Account - RightNation.US

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I used to dabble in certificates of deposit (CDs) and had a pretty good streak going. So as long you could live without the invested cash for a few months (or years), it was easy to beat savings account rates; and sometimes trounce them. But then, banks became much less interested in paying you interest to borrow your money, and the CD market became unappealing.

The last time I looked at CDs, I was earning 0.10% on my "enhanced" savings account; a rate which the below editorial refers to as "microscopic". In order to barely beat that rate, at a "miniscule" 0.12%, I would have had to invest at least $50,000 for 5-years. Since I was rolling out of a CD that had earned above 3.50% for 3-years, this was an insult.

The days of earning 15% in a money market fund are long gone (like mid-1980s); even at the institutional level, some banks are actually CHARGING clients to hold their cash, euphemistically calling it "negative interest". That's right, you deposit your cash there AND you have to pay them for the privilege of doing so. (Imagine a bank charging you 2.5% on balances over $2,500,000; earning 0.10% doesn't look so bad now, ey?)

The following editorial gives a layman's explanation for why things like this are happening; notably why rising Fed funds rates do not necessarily translate into banks paying you higher interest for your deposits. The author also notes the effects on the cost of borrowing from banks, and offers some suggestions for folks who want to improve their interest income and/or expense profiles.

Please keep in mind that what follows are one author's opinions; don't take it as qualified investment or debt-reduction advice. Consult a professional advisor (or trustworthy and knowledgeable family/friend) before moving cash or debt around.

Why You Don't Feel Fed Rate Hikes in Your Bank Account
Higher rates from Washington don't mean more interest just yet. But there are ways to shop around.

By Ben Steverman
July 18, 2017, 4:00 AM EDT
© Bloomberg L.P.
Source; drill down for hyperlinked references and supporting graphics; excerpts follow:


… So, 20 months after the first Fed rate hike, savers are still waiting for higher yields on their nest eggs, according to data provided by Bankrate.com. Interest rates for borrowers—on mortgages, auto loans, credit card debt—are mostly higher, but rates on some products have barely budged. By shopping around, both savers and debtors can get much better deals.

One goal of the Fed's monetary policy is to keep a lid on inflation. Young consumers today won't remember the 1970s and 1980s, when rapidly rising prices could quickly erode the value of your cash. U.S. consumer prices rose just 1.6 percent in the 12 months ending in June…

Even in this era of low inflation, money in the bank is losing buying power. That problem is exacerbated by the low rates that banks are paying on deposits. According to Bankrate.com, the average rate on a U.S. money market account has gone from a microscopic 0.1 percent 20 months ago to a miniscule 0.12 percent now. Prices, meanwhile, are rising 13 times faster...

So, it's not the same kind of inflation from 30-40 years ago, yet savings are being discouraged. That might be a good message for folks with cash to spare ("Invest in the market!") but for folks heading into retirement with no nest egg, it's the opposite of what they should be doing.


… Most banks have little incentive to boost rates on savings accounts or certificates of deposit, because they already have a glut of their customers' money. Some of the very biggest banks pay their customers the least. Rates on basic savings accounts at JPMorgan Chase, Bank of America, and Citibank start at 0.01 percent, and generally don't exceed 0.08 percent even for customers with millions of dollars in the bank…

Customers could increase their yield 100-fold by moving their money to banks who do need the money. The most generous online banks are now offering yields of 1.3 percent or more. Many are regional banks with idiosyncratic reasons for needing deposits. They may specialize in a type of lending that's growing fast, for example (such as loans to apartment building owners, who can refinance because property values have risen). There's little risk in trying out an obscure bank, as long as the deposits are insured by the Federal Deposit Insurance Corp., which guarantees up to at least $250,000 per person….

By the way, "online banks" does NOT mean cyber-money (like "bitcoin"); that's altogether a different thing.


… Lenders can afford to offer these (auto loan) rates—sometimes lower than on home mortgages—because they're aggressive about re-possessing the cars of borrowers who miss payments, McBride said. Auto defaults are soaring, too….

Yeah, watch out for that. Home mortgage defaults (and repossessions) heavily contributed to the ~2008 crisis, and abandoned homes did nothing to help cratering real estate market values. Cars, on the other hand, are a much more liquid asset; banks can flip them more easily. Maybe even "part" them out?


… Rates on home loans, meanwhile, are more influenced by the market prices for long-term bonds than they are by the short-term Fed funds rate. Mortgage rates actually fell in the year after Yellen started her rate hikes, but they've rebounded since then…

Fed funds are overnight rates, the shortest of "short term". Things like mortgages last for years or decades. Finally:


… For better or worse, Yellen and company can have a more direct impact on people with credit card debt. Most card rates automatically follow the prime rate, a bank-set number that closely follows the Fed funds rate.

Even here, though, consumers have opportunities to shop around. Cards with limited-time rates of zero percent are still available to people with good credit scores…

The whole Credit Score (AKA: "Credit Rating") scheme can be very mysterious to folks, at least until it smacks them in the head; then they become "experts". The short explanation: It's a measure of your creditworthiness, which also means your trustworthiness when it comes to financial matters.

Did you ever have someone close to you repeatedly borrow money, promising to pay you back, even though you never saw that money again? That's someone who is not trustworthy when it comes to financial matters. (You can keep "lending" them money if you wish but it might help your mental health if you think of it as a "gift".) Banks are businesses, not charities; when they lend you money they NEED to have it paid back (with interest). Therefore, they need a way to quantify the risk of lending money to a particular person or entity (like a business). That's where "credit rating" comes into play.

The better your credit rating, the better your opportunities; it's that simple. If you have a demonstrable history reneging on debts, your opportunities to borrow dry up. That's why genuine opportunities for interest expense reductions, as the author noted above, may only be available to those with good credit ratings.

I think this is an interesting editorial with plenty of food for thought. It is indeed possible to increase your interest income and/or decrease your interest expense. But it takes effort and you can't rely on the Fed to do it for you.

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