There is a scene in the 1983 comedy "Trading Places" where the business-saavy prostitute Ophelia (played by Jamie Lee Curtis) explains that she has "$42,000 in T-bills, earning interest" and expects to be retired from her profession in two or three years. (The scene is NSFW, in case you were thinking about Googling it). I was a year old when this movie came out so when I finally got around to seeing it some decades later that statement struck me as incredibly quaint — who would put their money in a savings vehicle just to let it rot? Better buy some stocks or index funds or something.
But at the time that movie came out in June 1983, the federal funds rate had cooled off to just under 9%. Mortgage rates were just a tick under 13%, the Treasury bills she was investing in were offering just under 11% interest, and the Dow Jones Industrial index was at about 3,600. So maybe she knew what she was talking about.
That anecdote says something about the era in which the movie was made, as well as the juxtaposition between that state of affairs and the one we've become accustomed to for most of the 21st century. Between the 2008 financial crisis and COVID, the Federal Reserve has become much more comfortable with a very large balance sheet that it can expand and contract, as well as with sending interest rates to zero (while other central banks, notably the European Central Bank, have even implemented negative interest rates).
Jerome Powell, chairman of the U.S. Federal Reserve, has indicated that the central bank will not rest until inflation is tamed, raising expectations that interest rates will remain relatively high for the foreseeable future.
Bloomberg News
It appears that some combination of COVID, supply chain issues, the war in Ukraine and who knows what else has finally awoken the sleeping giant of inflation, putting an end to the new 21st century normal of profoundly accommodative monetary policy. Fed Chair Jerome Powell recently minced no words when saying that the central bank's overriding concern is taming inflation, suggesting the current federal funds rate of about 2.25% will be going higher and staying higher for the foreseeable future. "Higher"of course is a relative term — interest rates can't help but go up after being at zero for something like 10 of the last 15 years.
But this raises the question of whether the interest rate environment of the 2020s and beyond will look more like the old normal of the late 1980s and 1990s than it has since the 2008 financial crisis. There's reason to believe that it will, at least as far as monetary policy is concerned, and banks are well poised to take advantage of that shift, expanding their earnings from traditional sources and reducing the need to reach for yield by entering speculative or highly risky activities.
As Fed goes full steam ahead on higher interest rates, banks brace for new normal
That's a good thing — bankers should welcome the prospect of getting back to being lenders again. But if banks won't have to reach for yield in this new landscape, depositors shouldn't have to either. And that's where savings accounts come in.
There is incomplete data on savings account rates over time, but you don't need a chart to know that savings account yields are effectively zero and have been for some time. Returns on certificates of deposit — a deal where you deposit your cash in a bank and don't withdraw for a specified term, usually 12 months — have similarly been very low for a very long time, not only failing to keep up with inflation but today offering five-year CDs at a paltry 65 basis points.
The reason for this is that banks don't really need deposits to make loans like they used to — the Fed has flooded the zone with so many asset purchases that banks don't really need topass interest earnings on to their customers to retain them. One bank, The Narrow Bank, obtained a state charter to effectively cut out the middleman and more or less offer the Fed funds rate to its clients directly — the idea being that other banks will more or less follow suit. Alas, TNB has not yet been granted a Fed master account to realize this dream, and while some high-yield savings accounts are being offered, it isn't clear that there is yet any industry pressure to address the millions of low-yield savings accounts out there.
The truth is I don't really know why the money people earn and put in their bank accounts (say 15 basis points) is worth less in interest terms than the 2.25% banks get from the Fed in the form of interest on excess reserves. But one of the advantages of the old normal was that money was scarce, and if you had some you could watch it grow without having to take on a lot of risk. If we're going back to an old normal where money is valuable again, policymakers should find a way to ensure that working people's money is valuable, too.
The Long Island bank is the latest financial institution to use new equity to restructure its balance sheet and unload low-yielding assets. Its stock price tumbled after the shares were priced at a considerable discount.
Affirm partners with Sixth Street to sell its buy now/pay later loans to the investment firm; Associated Banc-Corp promotes Steven Zandpour to deputy head of consumer and business banking; Visa Direct speeds up its money transfers; and more in this week's banking news roundup.
Banks will feel the fallout from a court's decision to strike down a Nasdaq rule that would have mandated more disclosure about the racial and gender composition of corporate boards.
The bank said it redeployed proceeds from the sale into high-yielding investments. It also said it would end an employee pension plan to curb expenses.
A close result was complicated by an hour-long adjournment of the New York-based company's annual meeting that angered dissident investors and left them mulling legal action.
