Will Trump Make Deposit Rates Great Again?

For savers who have lived with the ultra low interest rate environment for the last eight years, they may take some comfort that President-elect Donald Trump has said “Yellen is keeping rates too low, too long.” A Trump Presidency could speed up the pace of Fed rate hikes, and based on interest rate history, deposit rates do track Fed rate hikes and have often outpaced Fed rate increases.

The first way a Trump Presidency may speed up the pace of Fed rate hikes is by changing the Fed. The most obvious change would be to replace Fed Chair Janet Yellen who is considered to be dovish on the Fed hawk-dove scale. The earliest that Trump can replace Fed Chair Janet Yellen is February 2018 when her term ends. Trump could put pressure on Yellen to step down, but that doesn’t guarantee a change. Fed Vice Chair, Stanley Fischer, is also considered dovish. His term as Vice Chair is scheduled to end on June 2018.

The most important part of the Fed in terms of policy action is the seven-member board of governors. These are permanent voting members on the rate-setting FOMC. Most members of this group have long been considered dovish. Fed governors are nominated by the President and confirmed by the Senate. Currently, there are two vacancies. President-elect Trump will likely be able to fill these two vacancies in 2017 with hawks.

Even a new more hawkish Fed will find it difficult to raise rates if the economy isn’t growing. Higher rates will depend on a growing and strengthening economy. This Wall Street Journal article cites a survey of economists who forecast rising GDP, inflation and interest rates under a Trump Presidency. According to the article, this is due to “Republican’s proposals to reduce taxes and invest in infrastructure will amount to a substantial fiscal stimulus.” However, there are risks. Economists worry about the potential of a trade war.

Another thing that impacts not only the economy, but also banks’ decisions on deposit rates is financial regulation. According to this Wall Street Journal article:

President-elect Donald Trump vowed anew on Friday to dismantle the 2010 Dodd-Frank financial overhaul, at the same time his transition team is tempering expectations for a full repeal of the sweeping law.

It’s good to hear that a full repeal is unlikely. Don’t forget that the standard deposit insurance coverage increase to $250,000 was part of Dodd-Frank law. An important part of the regulation was to prevent a repeat of the 2008 financial crisis. Hopefully, changes will only improve the regulation in that regard. Of course, the Dodd-Frank Act was massive, and bank industry argued that it was costly even to community banks. If changes can be made to reduce the cost for banks and to make it easier for them to lend, that may help push deposit rates higher.

Changes In Our Deposit Account Strategy?

After the last eight years of this ultra low interest rate environment, changes that give hope to higher interest rates are refreshing. As DA reader Lou commented in the forum “we might finally see a normalization of interest rates.”

Changes may not come fast enough for savers. Even a more hawkish Fed will probably not be in a rush to increase rates. Also, many fiscal policy changes will need Congressional approval, and that will likely not be fast with a Senate that only has a slight Republican majority. And once new laws are enacted, their effect on the economy can take awhile. In summary, I think it’s too soon to make major deposit account strategy changes. Rates may still rise much slower than we would like to think. The same strategies that I suggested in January still make sense today.