Sorry savers, banks don’t want your money

Placeholder while loading article actions

Savers are about to learn a painful and surprising lesson about interest rates and banks.

First, just because the Federal Reserve raises rates doesn’t mean the rate investors earn on their money will rise as much, if at all. Indeed, the financial repression in the form of zero rates suffered for more than ten years by the ultraconservatives of their savings is not about to dissipate. Second, the banks don’t want your money. Understanding these dynamics will go a long way in explaining why the stock market and other riskier assets may prove resilient to the looming monetary policy tightening as the Fed seeks to bring down the highest inflation rates in 40 years.

First, a bit of history. In response to the 2008 financial crisis and to pull the economy out of recession, the Fed cut its key rate to near zero, and the banks naturally followed suit. But making access to credit easier and cheaper was only part of the strategy. The central bank also wanted to create the “wealth effect”, hoping that people would withdraw money from savings and money market accounts and put it into riskier assets such as stocks, triggering rallies that would make people richer.

Although not official Fed policy, policymakers over the years have explained how rising prices for stocks and other assets tend to boost consumer spending and the economy. in its entirety. Former Fed Chairman Alan Greenspan told Bloomberg News in 2009 that “all the statistical evidence points to the level of household wealth being a major factor in consumer spending.” This gave rise to the concept of “TINA”, which means “there is no alternative”. In other words, savers had no choice but to put their money in stocks if they hoped to get any return. And it largely worked, especially for wealthy households, as the S&P 500 index staged a historic rally, generating a total return – price appreciation plus dividends – of 614% since early 2009, or 16.2% annually. .

The problem for savers now is that the Fed has also taken the additional step of pumping money directly into the financial system by buying bonds in the secondary market through a program known as easing. quantitative. Fed balance sheet assets have grown from less than $1 trillion in 2008 to around $9 trillion today, more than doubling since the start of the pandemic alone as the central bank accelerated purchases to help support the functioning of the financial system. At the same time, the government has pumped billions of dollars straight into consumers’ pockets and businesses’ coffers to help them overcome lockdowns.

The result was an explosion in the money supply, from less than $8 trillion to some $22 trillion at the last count in February. Verifiable deposits for households and nonprofits rose to $4.06 trillion in December from $1.16 trillion at the end of 2019 and about $200 billion in 2008, according to the Fed. Excess liquidity in banks – or the amount by which deposits exceed loans – jumped to more than $7 trillion, from $3 trillion in 2019 and around $250 billion in 2008.

In short, the banks have more money than they know what to do with, and they don’t need or want yours anymore. This can be seen in the rates banks are offering for federally insured two-year certificates of deposit, which average just 0.39%, according to Bankrate.com, although yields on bonds two-year US Treasury yield jumped less than 0.15% last year. to a recent 2.70%. Historically, the two rates have tended to move in tandem with little difference. The gap is now the widest on record.

It’s the same with money market funds. Consider the $210 billion Vanguard Federal Money Market Fund, one of the largest such funds. It returns a miniscule 0.22%, which is more like an 8% loss after factoring in the current annual inflation rate. And yet, some $4.5 trillion is in such accounts, up from about $3.6 trillion before the pandemic and $2.5 trillion a decade ago, according to the Investment Company Institute.

The simple fact is that there is too much money circulating in the financial system. And everyone knows that when there’s too much supply of something, prices – or, in this case, savings rates – don’t go up. It has been a painful dozen years for savers. Unfortunately for them, it will stay that way for a long time.

More other writers at Bloomberg Opinion:

• The easiest way to improve monetary policy: Clive Crook

• No one really understands real interest rates: Tyler Cowen

• You say the Fed is behind the curve? Prove it: Matthew Winkler

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Robert Burgess is the editor of Bloomberg Opinion. He is the former global financial markets editor for Bloomberg News. As editor, he led the company’s news coverage of credit markets during the global financial crisis.

More stories like this are available at bloomberg.com/opinion

Comments are closed.