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Despite 7.5% Inflation, 0.50% is the New "High Yield" Interest Rate for Savers

With the CPI running a hot 7.5%, the most in 40 years, how much can you get for bank deposits?
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Data from NerdWallet, chart by Mish 

Data from NerdWallet, chart by Mish 

A few days ago we were informed by our bank that fees on out checking account would rise to $25 a month unless we kept a minimum of $10,000 a month in the account. 

I started looking around for the best rates for any account. Even on savings accounts, the best generally available rate is around 0.50%. 

I did not look much closer so there could be hidden gotchas at those rates. 

NerdWallet notes the national average is 0.06% APY on savings accounts.

Bank of America Deposit Rates

Chart courtesy of Bank of America (BofA)

Chart courtesy of Bank of America (BofA)

The above chart is from Bank of America as of February 9, 2022. 

The annual interest rates paid on new and existing accounts is 0.01% up to $99,999 and 0.02% for higher balances. Platinum and Diamond honor accounts get 0.04%. 

BofA refers to this as " Preferred Rewards Tiers" clearly using the word "rewards" quite loosely.

Implied Message

The Bank of America implied message speaks loud and clear: 

  • Please take your money elsewhere unless you are happy with nothing.
  • Unless you want to borrow money, we really can't be bothered.

Result of Fed QE 

This "please go away" behavior is one artifact of the massive amount of QE the Fed is still pumping. 

This has been going on for a long time. 

On August 23, 2021 Bloomberg reported Fed’s Ability to Set Rates Floor Is Weakening on Cash Deluge, emphasis mine.

The pressure pushing down overnight rates toward zero is proving a major headache for money-market funds. It hampers their ability to invest profitably, and can lead to further disruptions as they begin to waive fees to avoid passing on negative rates to shareholders. A number of firms including Vanguard Group shut down prime money-market funds last year after struggling to cover operating costs in the low-interest-rate environment.

QE applies downward pressure on rates. 

The Fed's balance sheet is roughly $8.9 trillion dollars and still expanding despite soaring inflation. 

Breaking the Buck

The Fed started paying non-banks interest on reserves or the money market funds or yields would have gone negative and the money market funds would have then been forced to charge interest (not pay interest) on deposits.

The 1-month T-Bill rates has been about 0.03%. That is not enough money for Money Market funds to stay in business.

The Fed pays 0.15% interest on reserves. However, only banks get that 0.15%. Money Market Mutual Funds don't, and many of them closed. 

To prevent breaking the buck (money markets charging interest on deposits), the Fed recently started paying non-banks 0.05%.

It's interesting that BofA can make 0.15% on reserves while only paying 0.01% to 0.04% and it still does not want the deposits. Alternatively, so many people will gladly take nothing so why should BofA pay more.

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Fed's Policies Have Crucified Savers

The Fed's policies rewarded the speculators and crucified the savers, especially the poor. 

The Fed Chair, currently Jerome Powell, meets twice a year with Congress. Tough questions never come up. 

 Sweet Deal for Banks

The Fed currently pays banks 0.15% interest on reserves.

With QE at $8.9 trillion dollars, banks annually collect $13,350,000,000 interest annually on free money the Fed crammed down their throats. 

This has been going since former Fed Chair Ben Bernanke lobbied Congress for the right to pay banks money on excess reserves. The Fed then reduced the reserve requirement to zero, making all reserves excess reserves, now simply called reserves.

I suspect interest the Fed pays on reserves will rise in March, possibly to 0.40% or higher when it hikes in March. On a double hike by 50 basis points, the Fed might pas as much as 0.60% interest on reserves.

Since the Fed has no intention of winding down its balance sheet, the 0.40% interest rate would allow banks to collect $35,600,000,000 a year in "free" money. 

It's not really free, of course. You and I (taxpayers) foot this bill.

CPI Highest in 40 Years

Despite collecting next to nothing on deposits note that the CPI rose another 0.6% in January, at a year-over-year clip of 7.5%.

For discussion, please see CPI Jumps Most Since February 1982, Up at Least 0.5% 9 Out of Eleven Months

Will Savings Account Rates Rise in March?

The Fed will hike rates in March to the 0.25%-0.50% range or the 0.50%-0.75% range from the current 0.00%-0.25% range.

Q: Will savings account rates rise with Fed hikes?
A: Don't necessarily count on it. 

Banks don't really lend from deposits or from bank reserves or QE the Fed forced down their throats. 

That said rates may go up a bit, but less than the amount the Fed pays on reserves. 

The Fed Uncertainty Principle and a Big Swift Kick in the Pants

Does the Fed follow the market's lead? Most believe so, but it's not quite that simple.

For discussion of how much the Fed will hike in June, please see The Fed Uncertainty Principle and a Big Swift Kick in the Pants

This post originated at MishTalk.Com.

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