Yields on deposit accounts have started to creep higher amid rising inflation and interest rates, but the changes so far are hard to detect unless you use a magnifying glass.
Yield increases often are more noticeable when inflation is heating up and the Federal Reserve jacks up interest rates, like now. But rates paid on deposits are slow to respond this time, and this scenario might persist for a while, owing to unusual conditions.
This isn’t good news for savers who have grappled with meager yields for more than a decade. Savers haven’t suffered actual losses like stock market investors, but they, too, are hurt as inflation erodes the real value of their accounts.
The silver lining is that yield pressures for retirees are partly offset by higher Social Security benefits that will rise again next year, perhaps substantially.
Some increases, but not much
Some types of yields have risen this year, but the changes are more noticeable in percentage terms rather than in actual dollars and cents.
For example, yields on one-year certificates of deposit jumped to 0.37% on average for the week ended June 22 from 0.19% as of March 9, reports Bankrate.com. Rates on 5-year CDs are now up to 0.62% from 0.37% roughly three months earlier.
But those changes aren’t so obvious because the starting levels were so low. Recent yield increases don’t seem anywhere near as dramatic as in previous decades, when the Fed hiked interest rates aggressively to temper inflation.
One of the most dramatic examples, according to data from the Federal Reserve Bank of St. Louis, was the surge in 3-month CD yields from 11.3% in September 1980 to 18.7% in December of that year, when the Fed finally started to get its arms around inflation. A more recent example was the jump in 3-month CD rates from 1.1% in early 2004 to 5.5% by mid-2006.
Some yields haven’t changed much at all, such as the meager rise in money-market interest from 0.07% in early March to 0.09% in late June, according to Bankrate.com.
Banks don’t need your money
A big part of the problem, from the perspective of savers, is that banks, credit unions and other competitors already are awash in deposits.
“We’re all sitting on a lot of cash,” said Ron Westad, CEO of Arizona Financial Credit Union, formerly Arizona Federal. “Nobody’s got a real need to attract deposits right now.”
For example, the nation’s roughly 4,800 banks monitored by the Federal Deposit Insurance Corp. ended the first quarter of 2022 with just shy of $10 trillion in insured deposits. That’s a record level, and it follows eight straight years of deposit increases.
Loan growth hasn’t kept pace, which means many institutions have more deposits than they would like, given their lending needs. Nor are banks and credit unions so far generating higher spreads between what they earn on loans and pay on deposits.
However, spreads likely will expand with rising interest rates and, eventually, banks and credit unions will increase deposit yields more noticeably, Westad predicted.
“The level of deposits in the banking system as a whole ultimately depends on the public’s preference for holding deposits and banks’ willingness to compete for deposits,” noted the Office of the Comptroller of the Currency in a recent report. And lately, banks and credit unions haven’t competed all that much.
Market turmoil hasn’t helped
That OCC report was written in January, right as the stock market was beginning a major downdraft. Since then, risky investments have looked even less appealing for people who might otherwise have considered moving some deposit money into the stock market, which is on pace for a decline of more than 20% in the first half of 2022.
Even more telling, bonds also have taken a hit amid the inflationary surge and Fed efforts to contain it with interest-rate hikes. Bond prices have fallen, too. That’s significant because, when savers are willing to invest in riskier assets, it’s the bond market where many will venture to first. In other words, bonds and bond funds, especially with short-term maturities, are the next step out onto the risk curve, whereas stock market investments represent more of a leap.
“Increased caution and the desire by households and businesses to build a buffer … of cash led to a record level of bank deposits,” the OCC wrote.
Although those comments were focused around the uncertainty caused by the COVID-19 pandemic, when deposits jumped dramatically, they also apply to the more recent turmoil in the financial markets, elevated recession dangers and declining consumer and business confidence.
Social Security tempers the pain
But there is a saving grace, at least for retirees, because Social Security benefits are rising now amid the inflation surge. Retirement benefits increase most years from a COLA, or Cost of Living Adjustment, and the next one could be a whopper.
For 2022, retirees received a 5.9% Social Security COLA boost, the highest since 1982, and that will rise substantially for 2023, predicts the Committee for a Responsible Federal Budget.
The actual results won’t be announced until October, as the adjustment is based on inflation through the 12 months ending in September. However, the next COLA will total 10.8% if inflation continues at its current pace, the group estimates. Even if inflation somehow miraculously vanishes from now through September, the increase still will hit 7.3%, based on inflation over the past eight months.
The final adjustment likely will fall somewhere between those ranges, as recent inflation surges have shown signs of flattening out, the committee predicts.
At any rate, the 2023 COLA could be the largest since two years of 11%-plus increases in 1980 and 1981. It also would stand in sharp contrast to three fairly recent years — 2010, 2011 and 2016 — when no COLAs were paid.
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