The Federal Reserve did banks a favor last week by boosting its target interest rate for the third time in 15 months, opening the gate to higher interest rates on credit cards, mortgages and other loans.
So will savers share in the good fortune through higher rates of return on deposits and CDs?
Maybe, but not as quickly or as much if recent history is a guide.
Banks, eager to recoup lost profits and awash in deposits, have been much slower to boost the interest they pay as opposed to the interest they charge.
That’s not news to Lawrenceville retirees Dee and Don Sebusch.
For about a decade, the couple have depended on interest from a handful of long-term CDs to supplement their income. But those have been maturing over the last few years and re-setting to much lower interest rates. The last interest rate Sebusch’s bank offered her to lock up her money in a CD for another five years: 0.5 percent.
“It’s disappointing. You don’t know where to put your money,” said Sebusch, who is leery of riskier investments such as stocks or mutual funds. For now, she added, she’s keeping her money in a savings account that earns a microscopic interest rate while she waits for interest rates to go back up.
She may have to wait a while.
“Savers have been enduring these dramatically low returns for nine years, and it’s only slowly getting better,” said Greg McBride, chief financial analyst at financial website Bankrate.com. “Rates are getting better. It’s just going to be slow.”
During the 2007-2009 Great Recession, the Fed dropped interest rates to near zero in an effort to revive the economy. The Fed cut its target rate on overnight loans between banks from 5.25 percent in 2007 to less than 0.25 percent in late 2008, and kept it there for another seven years.
Through 2015, low rates since the financial crisis have cost U.S. savers almost $1 trillion in lost income on savings accounts, bonds and CDs, insurer Swiss Re estimates.
The Fed finally felt confident enough in the economy’s health to start nudging interest rates higher in December 2015, and has since boosted the target rate two more times through last week.
Last Wednesday, the Fed raised its target interest rate by a quarter point, to a range of .75 to 1 percent. The Fed is expected to raise rates two more times by year-end if the economy remains on course.
Technically, those rates only apply to behind-the-scenes money movements by financial institutions, but they also influence a range of consumer rates.
Higher rates on credit cards and home equity credit lines will show up in a month or two, McBride said.
The effect on adjustable-rate mortgages will take longer because the interest rates on most of those loans re-set once a year, he said. But the shock will be bigger because the higher rate may reflect two or three of the Fed’s rate hikes.
For example, on a $400,000 mortgage for 20 years, if the new rate jumps by .75 percent, monthly payments will rise by about $150, he said.
“It can feel like water torture real fast,” he said, suggesting that borrowers should re-finance such loans to fixed-rate mortgages as soon as possible.
Banks also quickly increased rates for many business loans. On the same day the Fed raised its target rate, for instance, Atlanta-based SunTrust Banks increased its prime rate (for its most credit-worthy customers) from 3.75 percent to 4 percent.
Meanwhile, the torture continues for most savers.
McBride said there are clear market forces behind the banks’ decisions to keep interest rates on savings low.
“Banks have been squeezed by tight margins,” said McBride.
The Fed’s low-rate regimen eventually helped rev up borrowing by customers and companies to buy cars, houses, robots, start-up businesses and other assets. That in turn helped grow the economy and create jobs.
But those interest rates were low for years and years, cutting bank profits, he said.
Meanwhile, banks were flooded with deposits after the 2007-2009 stock market crash.
Despite anemic interest rates, savers have been socking away a bigger chunk of their disposable income since the Great Recession. Personal savings have increased from a near-historic low of 3 percent of income in late 2007 to 5.5 percent currently, according to the Federal Reserve Bank of St. Louis.
Much of that money has been going into the stock market, which has hit record highs recently. Still, there is cause for hope for savers who don’t want to jump into the stock market, now in its eighth year of a bull run.
Bob Willis, president of Willis Investment Counsel in Gainesville, said he expects rates on CDs and other conservative investments to rise within months.
“By fall, yields should be sufficiently attractive to many who are either weary of the market’s volatility, or who are concerned about the market being ‘too high,’ ” said Willis, whose firm manages $2 billion in assets. “Plus, compared to years of near zero yields, yields of 1.25 - 1.75% will look attractive.”
New online players also are reviving rates of return for savers.
“There are banks that are raising rates” on CDs, money market and savings accounts, said McBride. But “you have to go out and search,” he added.
Some of the accounts topping the websites’ lists are at low-cost, online-only institutions such as Ally Financial, Synchrony or PurePoint Financial that can out-bid traditional banks. Others are online arms of Wall Street or international financial firms, such as Goldman Sachs, Barclays and CIT Group.
Several such players offer low-balance online savings or money market accounts paying up to 1.05 percent.
But so far the online challenge hasn’t sparked a rate war. Few physical banks and credit unions in metro Atlanta currently offer interest rates topping 0.15 percent on similar accounts. Rates are lower at most; you’d make more money picking up pennies on the sidewalk.
According to Bankrate.com, among local institutions, Atlanta Postal Credit Union offered the highest rate on a savings account: 0.6 percent.
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