Why are bank and money market rates dropping?

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nisiprius
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Why are bank and money market rates dropping?

Post by nisiprius » Thu Jan 14, 2010 7:50 pm

The Fed reduced interest about as low as it can go in 2008, and nothing much seems to have happened since:

Image

So why did bank interest rates continue to decline steadily all last year? (ING Direct from 1.4% to 1.3% to 1.25% over about the last six months; my spiffy new Reward Checking account from 4.51% to 3.51% last Spring, then 3.01% and now 2.76%)? Money market rates, from 0.6% and 0.7% to zero?

Is it, basically, a strong-arm move--because they can? For the same reason that interest rates are declining yet our credit card interest rates have increased?
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Post by retcaveman » Thu Jan 14, 2010 8:42 pm

I don't know why, but we had a similar experience.

2/09 rate = 3.56%

4/09 = 2.53%

5/09 = 2.02%

6/09 = 1.64%

9/09 = 1.51%

10/09 to present = 1.26% vs V Prime at .05%
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stratton
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Post by stratton » Thu Jan 14, 2010 8:45 pm

I believe the FDIC slapped interest rate limits on any advertised rates for problem banks and it was supposedly going to take effect in Jan 2010.

I don't know if supplying rates to a comparison web site constitutes "advertising."

You might need to check actual bank web sites.

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Post by neverknow » Thu Jan 14, 2010 9:00 pm

..
Last edited by neverknow on Mon Jan 17, 2011 10:05 am, edited 1 time in total.

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dm200
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Post by dm200 » Thu Jan 14, 2010 9:43 pm

Is it, basically, a strong-arm move--because they can? For the same reason that interest rates are declining yet our credit card interest rates have increased?
No, I really doubt this. Beacuse rates have stayed low for so long, investments that roll over during this time are renewed at low rates, leaving a smaller margin. There is some degree of lag in interest rate moves at banks and credit union. In addition, funds have flowed into many banks and credit unions during this time and they can not invest this flow of money at anything but low rates.

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Kenster1
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Post by Kenster1 » Thu Jan 14, 2010 9:44 pm

Hey, they had to do something to help keep up with the bonuses, right?
:lol: :shock: :lol:
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Post by Fbone » Thu Jan 14, 2010 9:47 pm

I believe stratton is correct. Sheila Bair didnt like how failing institutions raised interest rates to crazy levels to add capital. And then fail.

The limit discussed was 0.75% above industry average.

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Post by Rose21 » Thu Jan 14, 2010 10:04 pm

Banks have been able to borrow money from the Fed at zero percent interest and make a tidy little profit on the spread. I suspect our deposits are a mere annoyance at this point.

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Post by joe8d » Thu Jan 14, 2010 10:08 pm

Banks have been able to borrow money from the Fed at zero percent interest and make a tidy little profit on the spread. I suspect our deposits are a mere annoyance at this point.
Exactly.They just use it to buy long term Treasuries instead of loaning it out.
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Post by MWCA » Thu Jan 14, 2010 10:13 pm

joe8d wrote:
Banks have been able to borrow money from the Fed at zero percent interest and make a tidy little profit on the spread. I suspect our deposits are a mere annoyance at this point.
Exactly.They just use it to buy long term Treasuries instead of loaning it out.
Id probably do the same considering the work environment.
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Post by Harold » Thu Jan 14, 2010 10:42 pm

Rose21 wrote:Banks have been able to borrow money from the Fed at zero percent interest and make a tidy little profit on the spread. I suspect our deposits are a mere annoyance at this point.
Actually the discount rate is .5%, so borrowing from the Fed isn't the explanation. The fed funds rate is near zero, so banks making overnight loans to each other may be what you mean.

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Post by tallylynne » Mon Jan 18, 2010 11:11 pm

There's an answer, but it'd be deemed "political" on this board and deleted.

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Post by tfb » Mon Jan 18, 2010 11:30 pm

As for everthing related to prices, supply and demand. If the demand for deposit drops, so does interest rate. Rewards checking has a promotional aspect. After enough people sign up, rates drop. MM rates are set by the market.
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Post by ickeal » Mon Jan 18, 2010 11:41 pm

One word...

DEFLATION

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Post by norookie » Tue Jan 19, 2010 1:06 am

SHasNotYetHitTheF......IYKWIM.- My bear mkt to come comments witheld -(political comments deleted by me :wink: ) refer to Nisiprius post.
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Re: Why are bank and money market rates dropping?

Post by drjdpowell » Tue Jan 19, 2010 4:23 am

nisiprius wrote:So why did bank interest rates continue to decline steadily all last year? (ING Direct from 1.4% to 1.3% to 1.25% over about the last six months; my spiffy new Reward Checking account from 4.51% to 3.51% last Spring, then 3.01% and now 2.76%)? Money market rates, from 0.6% and 0.7% to zero?
To answer that question one would first have to understand why your bank has been paying you 2.76% or more for a year despite the fact that it could have borrowed at 0.5% or less elsewhere.

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Post by spam » Tue Jan 19, 2010 4:53 am

Maybe it is the result of reinvestment risk as experienced by the banks. Older and better yields are maturing, and must be replaced with new issues which have near zero rates.

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Post by Levett » Tue Jan 19, 2010 5:33 am

Nisiprius--

I assume you read yesterday's editorial in the New York Times?

Here 'tis just in case.

http://www.nytimes.com/2010/01/18/opinion/18mon3.html

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nisiprius
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Post by nisiprius » Tue Jan 19, 2010 7:43 am

bob u. wrote:I assume you read yesterday's editorial in the New York Times?

Here 'tis just in case.

http://www.nytimes.com/2010/01/18/opinion/18mon3.html

Bob U.
Wow, very interesting. Thanks. Emphasis supplied:
...measly savings yields are central to the government effort to buy time for the banks to earn their way back to health. By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the Federal Reserve has enabled banks to borrow cheaply. The banks re-lend that cheap money, but not necessarily to consumers and businesses. They can, for example, lend it to back to the federal government by buying Treasury securities... At the same time, banks are awash in deposits, much of it from investors who have pulled their money out of riskier investments. With money rolling in, big banks don’t need to compete with one another.
Grumble, grumble, I just hope they follow interest rates up when interest rates eventually rise. (It always amazes me how credit card rates follow general interest rates up but not down, while bank interest rates follow general interest rates down but not up. I guess their credit card divisions haven't heard about borrowing money cheaply from the Fed, huh?)

No, I don't follow the New York Times. I do rely on its being there, on demand as it were.

Am currently experiencing a little crisis because the Boston Public Library no longer affords (in two senses of the word) remote home access to the New York Times archive database, I loved poking around in the 1930s and 1950s financial news...
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Post by Rose21 » Tue Jan 19, 2010 9:26 am

Actually the discount rate is .5%, so borrowing from the Fed isn't the explanation. The fed funds rate is near zero, so banks making overnight loans to each other may be what you mean.
No, I was referring to the billions of dollars in daily borrowing directly from the Fed. When those funds are re-deposited with the Fed, they earn interest, bringing the effective rate at which banks borrow to below zero. (Never mind the spread they get when the funds are invested in long-term treasuries or other high-yielding assets).

This is all the more troubling in view of the fact that, based on November's CPI number (1.84%), the real rate of return on deposit accounts and money market funds has gone negative.

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Post by Valuethinker » Tue Jan 19, 2010 11:39 am

nisiprius wrote:
bob u. wrote:I assume you read yesterday's editorial in the New York Times?

Here 'tis just in case.

http://www.nytimes.com/2010/01/18/opinion/18mon3.html

Bob U.
Wow, very interesting. Thanks. Emphasis supplied:
...measly savings yields are central to the government effort to buy time for the banks to earn their way back to health. By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the Federal Reserve has enabled banks to borrow cheaply. The banks re-lend that cheap money, but not necessarily to consumers and businesses. They can, for example, lend it to back to the federal government by buying Treasury securities... At the same time, banks are awash in deposits, much of it from investors who have pulled their money out of riskier investments. With money rolling in, big banks don’t need to compete with one another.
Grumble, grumble, I just hope they follow interest rates up when interest rates eventually rise. (It always amazes me how credit card rates follow general interest rates up but not down, while bank interest rates follow general interest rates down but not up. I guess their credit card divisions haven't heard about borrowing money cheaply from the Fed, huh?)

No, I don't follow the New York Times. I do rely on its being there, on demand as it were.

Am currently experiencing a little crisis because the Boston Public Library no longer affords (in two senses of the word) remote home access to the New York Times archive database, I loved poking around in the 1930s and 1950s financial news...
The key thing here is the banks no longer need to offer those rates to attract funds.

During the credit crunch, they did.

Now, they are able to attract funds at lower rates-- people are less afraid of the banks going bust.

Fed is not going to raise rates until it is sure economy is durably recovering. In Japan in the 90s, the B of J retightened too soon, and that led to a reversal back into recession/ depression.

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Post by Kenster1 » Wed Jan 20, 2010 12:10 pm

Northern Trust Corp., the third- largest independent custody bank, said fourth-quarter earnings fell 39 percent as low interest rates reduced some fees.
"They're going to have to wait for the interest environment to change before they see earnings click back up," Marty Mosby, an analyst with FTN Equity Capital Markets Corp. in Memphis, Tennessee, said in an interview before results were announced. Mosby, who rates Northern Trust "neutral," expected the company to earn 67 cents a share.

Lower interest rates reduce the profit margins on Northern Trust's interest-bearing assets such as loans. Some of the company's operations, like securities lending, charge fees that are linked to interest rates. The U.S. Federal Reserve has kept its benchmark overnight lending rate between banks in the range of zero to 0.25 percent since Dec. 16, 2008, to combat declining credit and job losses. The rate was cut three times during that quarter from 2 percent.
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Post by eurowizard » Wed Jan 20, 2010 12:17 pm

Without being political, I believe the reduced rates are due to proposed increased taxation on banks and CC reform bills. Both cut into the banks bottom line and thus they need to reduce the yield to maintain the same level of profits.

If you or anyone else can do better in the current legislative environment, please open your open bank with above market savings yield and I will bank there.

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Post by Valuethinker » Wed Jan 20, 2010 5:54 pm

eurowizard wrote:Without being political, I believe the reduced rates are due to proposed increased taxation on banks and CC reform bills. Both cut into the banks bottom line and thus they need to reduce the yield to maintain the same level of profits.

If you or anyone else can do better in the current legislative environment, please open your open bank with above market savings yield and I will bank there.
Nonsense.

It's far fetched that a situation that has already occurred, is responding to the *possibility* of legislation, that in any case would only increase the cost to the bank of a bank account by 15 basis points pa.

Credit cards are profitable business for banks and quasi-banks. The proposed CC legislation will lead to a rebalancing of how they make that profits, but it will still be profitable (annual charges will probably go up).

The situation described is also global vis a vis interest rates and the charge, if enacted, will largely fall on US banks.

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Post by snowman9000 » Wed Jan 20, 2010 8:49 pm

As the saying goes, follow the money.

It's virtually an interest free loan from you to the bank, which becomes a low cost loan to the Treasury.

Savers are being royally screwed.

The entity which is forbidden to be discussed here is determining how much we make on our investments. And it ain't much. So we have to factor that into our investment decisions, whether we can discuss it here or not.

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Post by the intruder » Thu Jan 21, 2010 7:20 pm

snowman9000 wrote:As the saying goes, follow the money.

It's virtually an interest free loan from you to the bank, which becomes a low cost loan to the Treasury.

Savers are being royally screwed.

The entity which is forbidden to be discussed here is determining how much we make on our investments. And it ain't much. So we have to factor that into our investment decisions, whether we can discuss it here or not.
Maybe the fed is giving you a not so subtile hint to invest your money elsewhere such as in the stock market as it is allowing debtors to borrow at incredibily low rates- 4.25% on 15 year mortgages in Dec, now about 4.75%.

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