The folks at Grow asked me to explain a frustrating situation recently: Interest rates are going up for everyone — except consumers! Savers are still getting almost nothing for their virtuous habit of saving money. Meanwhile, now that the Fed is raising rates, all the rates that *hurt* consumers — credit card rates, mortgage rates, etc. — are going up. Why would this be? Turns out the explanation is pretty similar to the reason gas prices (or airline tickets) go up so quickly when there’s a shock in the price of oil, but they drop back down much more slowly when oil goes back to normal.
Here’s part of the story I wrote for Grow. You can read the rest here.
You’ve heard so much doom and gloom about rising interest rates that it can be easy to forget — higher rates are a good thing for savers! People who’ve been methodically squirreling cash away, and who’ve suffered through years of near-0% savings rates, should really have something to celebrate in a rising interest rate environment.
That’s assuming banks *ever* raise rates they give consumers. So far, nothing doing. What gives?
Several factors contribute to depressing passbook savings rates (and other cash-like account rates, such CDs or money market accounts). It’s easy to forget the traditional reason that banks offer interest to savers: They want your cash so they can lend it out at higher rates. Modern banking rules require that banks need only a small percentage of deposits to cover the money they lend, but still, demand for loans helps set demand for savings, reminds Ken Tumin, creator of DepositAccounts.com. With the economy still moving in fits and starts, don’t expect loan demand to help push up demand for savings deposits, Tumin warned.
A related reason for stubbornly low rates is simple market forces: Banks won’t raise rates until they see other banks raising rates. Why should they?
“It is very much competitor driven,” he said.
Banks also feel like they got permission from the Federal Reserve last year to play the game of freeze tag on savings rates. In late 2015, the Fed signaled it might raise rates its charged banks several times; ultimately it raised them only once, in December.
“Banks want to see more confidence in the economy from the Fed. They want to see two or three rate hikes before they raise the depositor rate,” he said. “It’s going to be very gradual.”
Ultimately, the real reason might have something to do with a newly-understood pattern in price competition that economists now call “asymmetric price adjustment.” You know this phenomenon by its most obvious example: When the price of oil gyrates, gas prices always go up faster than they go down, defying what would seem to be normal market forces. For years economists didn’t believe whiney consumers when they complained about this, but recent studies have shown it’s true: price “stickiness” usually hurts consumers and helps companies.
There are several mechanical reasons for this (read more at this link on my site), but suffice to say that companies do a better job of reacting to market changes than consumers, so they squeeze a few more dollars of profit whenever there is any kind of dramatic turnaround. In this case, banks are enjoying the widening spread between the price they pay consumers to keep their money, and the price they charge consumers to borrow that money. They are in no hurry to change that.
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