A Deposit Rate Shopping Spree Might Be Kicking Off

Fed’s quickening pace of tightening raises prospect that consumers and businesses may aggressively look to earn more on their cash

By guest author Telis Demos from the Wall Street Journal.

It is natural for people to want more for their savings as rates rise. The question is how willing banks are to give it to them.

The Federal Reserve’s most recent move to raise rates is surely beginning to catch the attention of people who have money deposited in banks earning minuscule interest. The prospect of inflation is likely to make people even more attuned to their cash, too. A recent survey of about 2000 U.S. consumers, published by Morgan Stanley analysts on Monday, found that concern about inflation was the highest ever in their survey history. Over 40 % of respondents said they would consider opening a new savings account for a rate of 1 %, and over 60 % would consider it for 2 %. Importantly, too, 57 % of consumers believe that opening a new account is “simple and worth the effort,” perhaps reflecting the success of financial technology in making action less painful than in past eras.

The initial reaction of some banks might be to tell consumers to go for it. Deposits across U.S. commercial banks are about 40 % higher than they were at this point in 2019, following a pandemic surge in Fed balance sheet growth and consumer and business savings. Many big banks have even struggled with their size, facing tighter capital constraints, and could be eager to let certain deposits leave, such as ones that don’t usually lead to other business.

But in addition to the temptation of rising rates on vehicles such as money-market funds outside of bank deposits, the pace at which the Fed is shrinking its balance sheet via quantitative tightening also may have the effect of pressuring the growth of deposits in the system—which could at some point push banks to compete more.

In the most recent data, through the week ended April 27, unadjusted for seasonal patterns, deposits across all commercial banks in the U.S. were down slightly from the week ended Dec. 29, according to Fed figures. That is a contrast to roughly 4 % and 12 % growth in 2021 and 2020 by a similar point in the year, respectively.

This could soon be reflected in competition for business deposits that tend to move aggressively. Though the increase for rates on commercial deposits was only “modest” after the initial March Fed rate rise, “the faster pace of quantitative tightening will accelerate balance competition systemwide,” according to a note last week by Curinos, which provides data, technology and analysis to financial institutions. Banks with any deposit outflows might “likely pull the rate lever sooner,” they wrote.

It is still early in the rate cycle, but investors in banks, brokerages and asset managers should be watching weekly tracking figures, online savings rates and even window stickers in bank branches very closely.

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