Banks are so loath to take on deposits that they are paying lower short-term interest rates than the U.S. government.

Interest rates on short-term jumbo certificates of deposit have been lower than yields on Treasury bills all year. This reversal of the traditional relationship between the two may limit the ability of the Federal Reserve to stimulate the economy by reducing short-term rates.

The FEd typically eases by cutting its target for the federal funds rate; this cut then is passed on to bank deposit rates, including those on CDs.

Banks are expected to pass on the cut in their cost of funds to borrowers by reducing their prime and other lending rates. Ultimately, the Fed attempts to spur lending by cutting the cost of funding.

However, bank deposit rates already are at rock bottom and have not yet spurred either a cut in the prime rate or a rush of new lending that would revitalize the economy.

The prime rate at most banks has beeb stuck at 6.5% since December as banks have used the wide spread between deposit and loan rates to fatten earnings.

Also complicating the situation is the reluctance of businesses and consumers to taken on new debt.

Depressed CD rates are a sign "that banks have all the money they need," said Alan Lerner, economist at Bankers Trust New York Corp.

A Reversal on Rates

Interest rates on 90-day CDs have been 2 to 8 basis points lower than yields on three-month Treasury bills, a sharp turnaround from last year when banks paid 15 to 77 basis-point premiums more than the rate on three-month Treasury bills, Salomon Brothers reported.

At the end of May, the 90-day bank CD rate was 3.72%, 8 basis points lower than the yield on the comparable Treasury bill.

The Resolution Trust Corp.'s active sales of deposits from failed thrifts have contributed to the decline in rates paid by banks, said John Leonard, banking analyst at Salomon Brothers.

The RTC has sold a much larger volume of deposits than loans to banks, Mr. Leonard said. Most banks are "between comfortably funded and over-funded," he said, as they use new deposits to support portfolio investments rather than replacing higher-cost liabilities.

"There are very, very few banks that have a need for more deposits," Mr. Leonard said.

"Banks aren't fighting aggressively for money," said Dana Sorrentino, money market economist at Citicorp.

As a result, deposits have been running out of banks and thrifts. The total of jumbo CDs at banks and thrifts fell by $82 billion, to $402 billion, in the 12 months ended in May, according to the Federal Reserve Board. CDs of less than $100,000 fell by $182 billion in the same period, to $965.8 billion.

Nonetheless, many economists think the Fed will ease one more time soon to get the prime down -- and this time, the banks may have no choice but to cut lending rates.

Expectations of an easing have been kept alive by a weak May employment report, sluggish money supply growth, weak retail sales data, and lower-than-expected consumer inflation.

Some money market economists are predicting the Fed will cut its target for the federal funds rate by 25 basis points, to 3.5%, to nudge banks into bringing the prime rate down 50 basis points, to 6%.

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