As speculation accelerates that the Federal Reserve will finally raise interest rates next month, some savers might be hoping they’ll see higher yields on interest-bearing products, such as savings accounts.
It might not be worth getting your hopes up too much, though.
If the Fed does bump up the federal funds rate, many are expecting at most only a one-quarter percentage point increase. Bankers and other experts say that won’t be enough to make banks want to pay you or me a whole lot more in interest.
One factor: Some banks are already flush with deposits, in part because consumers and businesses have parked their money instead of borrowing, as they wait for the economy to continue recovering.
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“We don’t see so much loan demand that we’ve got to go drive deposits in,” David Gaines, chief financial officer for Charlotte-based Park Sterling Bank, told me last week.
Then there are banks like Charlotte-based NewDominion, which CEO Blaine Jackson says has already raised deposit rates in anticipation of a Fed increase.
A push by banks to improve profitability is another reason savers might not see higher rates right away.
Greg McBride, chief financial analyst for Florida-based Bankrate.com, noted that low interest rates have squeezed banks’ net-interest margins. The margin, a key measure of lending profitability, is the difference between what banks pay, and earn, in interest.
McBride said some banks will likely try to hold off on paying consumers higher interest, but increase interest rates for lending, in order to improve their net-interest margins.
No one knows for sure if the Fed will increase the federal funds rate, the interest banks charge each other on overnight loans, during its Dec. 15-16 policy meeting. Investors and others hungry for clues have been following Fed Chair Janet Yellen’s every word since she took office in February 2014.
The federal funds rate has been near zero since the Fed slashed it in 2008 to help stimulate the economy during the Great Recession. Meeting minutes released this month show Fed officials last month thought the economic conditions needed to trigger a rate hike could “well be met” by their December meeting.
On Monday, responding to a letter from consumer advocate Ralph Nader, Yellen defended the low-rate policies that date to her predecessor Ben Bernanke. Nader wrote that savers are frustrated by the near-zero interest they are receiving.
Yellen acknowledged that savers could have seen higher returns on deposits had the Fed not lowered rates. But she said the low rates prevented an even worse downturn.
If banks do raise the interest rates they pay, experts say there’s typically a lag that could take months following any increase by the Fed.
Community banks might feel pressure to start raising interest rates sooner rather than later, independent bank analyst Nancy Bush said. Such banks continue to be on an acquisition spree and want to form loyalty with their new customers. Bush said those banks might end up raising the rates they pay to create that customer loyalty.
While a one-quarter percentage point increase won’t make any of us rich, it also means we shouldn’t expect to see a huge increase in what we pay in interest, either.
For example, McBride said a person taking out a $25,000 car loan would pay just $3 more a month.