Wall Street is pretty much in agreement that the Federal Reserve will lift interest rates on December 16.
What isn’t clear is what that will mean for competition for consumer deposits. Put another way, it isn’t obvious that consumers will have financial institutions competing for their cash by offering better returns.
“There’s probably no bigger debate today than this very issue,” Wells Fargo CEO John Stumpf said December 8 at the Goldman Sachs Financial Services Conference in New York. “And the frank, the honest answer is: none of us know.”
After nine years without a rate increase from the Federal Reserve, it is widely expected that next week US central bankers will reverse the zero-interest rate policies largely credited for the country’s economic rebound in the years after the financial crisis.
Fight for deposits
That could trigger a fight for deposits. In layman’s terms, consumers who had money in non-interest bearing accounts could switch to interest bearing accounts, or from money market funds to savings, certificate of deposit and longer-term products.
The simple way to think about it is that someone with money in a low-yielding account with Bank A could switch it to Bank B if Bank B is offering a higher return. That means better terms for consumers, but has a huge impact on bank profitability.
If rates finally go, it’s going to be the headline on every newspaper for two weeks running. It’s going to wake up consumers and everybody else to, ‘OK. Rates are there. I should be doing something about something. I don’t know what it is yet, but I’m going to figure it out.’ So you’ve got to pay attention to that. And we will.
There are also those that don’t think it will have that much of an impact, including Stumpf at Wells Fargo. He said at the Goldman Sachs event that the environment today is different to what it was back in the early noughties.
The last time I was involved in this, [got to] go to California; Bernanke was raising rates every quarter; and we had big competitors for deposits those days. We had the WaMus and World Savings and Countrywides and IndyMacs, who were using those deposits as just-in-time capital to fund their mortgage business, acquisition to sell. None of those folks are around this time.
He later said:
So if rates do increase ― and I think we are probably all in agreement that it looks like we will see our first one in December ― I happen to believe we will see a very tepid response, for the first couple of moves especially. It’s just not enough to matter.
I don’t know what the liquidity is going to be used for, to do — which asset are you chasing? Who out there might be chasing it? So that’s at least one person’s view.
Most banks are forecasting three rate hikes this year and next, meaning that the Federal Reserve. US Bancorp CFO Kathy Rogers said:
“We are projecting in our plan, a potential for two interest rate hikes next year, and then December 16 of this year; so a total of three if you look out over the course of the next 12 months… with the first rise, I don’t think we’ll see a significant amount of movement. But we’ll be watching it closely.
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