The Fed's Rate Hikes Aren't Keeping Up With Bank Savings Deposit Rates

Financial markets have been watching closely since March when Silicon Valley Bank and Signature Bank collapsed in order to address a flood of cash flowing into money-market funds as well as other higher yielding cash-like assets.

‍

A severe outbreak of bank failures in the United States has brought attention to the stability of the banking system in this country, and has also raised questions about alternative ways for savers and investors to earn yield, as the Federal Reserve continues its journey to tame inflation with higher interest rates as it has been doing for the past year.

‍

Astonishingly, banks have been able to maintain a low deposit rate, tracking in the 0.2% range for the past several years (see chart), despite rapid increases from the Federal Reserve, pushing short-term rates close to 5%.

‍

Goldman Sachs economists explained in a client note on Wednesday that the reason for the lag in bank deposit rates was that past increases in the Federal Reserve's policy rate usually took a few quarters to be seen in bank deposit rates.

‍

The increases in the short-term interest rate were, however, only a portion of what was being seen in the deposit rates and one-year CD yields.

‍

A Goldman economist led by Jan Hatzius wrote that at the end of the last U.S. hiking cycle, only 31% of the increase in the federal-funds rate was transferred to interest-bearing deposits as a result of the pass-through from policy rates to deposit rates (or equivalently, the increase in deposit betas). As a consequence of this, the pass-through from policy rates to deposit rates had become more limited.

‍

The cycle seems to be edging toward the pre-global financial crisis trend, meaning that the pass-through rate in this cycle could again surpass 50%, they said, if the cycle tracks more closely to the pre-global financial crisis trend. Furthermore, they pointed out that competitive pressure from other lenders might be driving higher deposit rates, as mobile banking has made it easier to use and high-yielding alternatives are becoming available.

‍

A Trade Algo report shows that the bond yield on the 6-month Treasury note was 4.8% on Wednesday, while the bond yield on the policy-sensitive 2-year note was 3.8%, well below the peak it hit in March above 5%.

‍

In the first week of April, stock markets have taken a mixed turn, with the Dow Jones Industrial Average expected to increase by 0.6% over the week, but the S&P 500 index declining by 0.5% throughout the week and the Nasdaq Composite Index down by 1.8%.