Since late 2015, the Federal Reserve has boosted the cost of money modestly, boosting government-to-bank interest rate targets by 1 percentage point.
Banks have passed that along to consumers — but unevenly:
Credit card rates charged to borrowers are up more than 0.5 percent, over the last year and a half.
But the savings rates that banks pay savers are up just 0.12 percent, for online savings accounts, or less, for checking accounts and branch savings accounts, according to WalletHub, the credit advisory website set up by former Capital One Bank executive Odysseas Papadimitriou. His firm polled 2,000 account holders for its latest quarterly survey.
What’s going on here?
“The Fed is just getting back to normal,” says James Chessen, chief economist since 1987 of the American Bankers’ Association, the lenders’ lobby.
Banks faced tough competition in the late-2000s recession and were unable to raise rates so long as the Fed kept money cheap, Chessen said. “Profit margins narrowed,” and small banks in particular found the business so unprofitable that hundreds that made it through the recession have sold out to larger companies, often at prices well below earlier valuations.
But why are loan rates going up at more than four times the rate of deposit yields? Because there’s more demand for credit than competition for savings, Chessen told me.
He expects the economy will slow “a bit” this year. “It would not surprise me if [gross domestic product growth] does not surpass 2 percent,” he said. That’s not enough to scare the Fed away from continuing to boost rates — slowly.
Meanwhile, the business community is frustrated that the tax reform and infrastructure spending plan that the Republicans and President Trump had hoped to use to stimulate the economy “has not played out yet,” Chessen added.
He noted that loan demand varies a lot among different states and metro areas. Loans are cheaper where the economy is slow, even for national online lenders who consider local competition when they set their rates.
I asked him whether regional Federal Reserve Bank presidents such as Patrick Harker in Philadelphia are likely to continue to push for higher rates, while Washington and New York bankers prefer the cheap-money policy, as was made plain when Federal Reserve deliberations from the months before last December’s rate increase were made public.
“The regional bank presidents see in real life what the impact is of rates in influencing inflation and business growth,” Chessen said. Washington and New York members “have been much more sensitive” about the divergence of interest rates globally. “They worry about getting too big a differential” between the Fed and the central banks in Europe, China, Japan, and England, he said. “They don’t want to create capital flows that are harmful to emerging countries.”