The following contribution is from Sabrina Karl. Sabrina is a data journalist with years of experience covering the consumer deposits sector, and we’re excited to have her delving into our proprietary database of deposits data to uncover stories like the one below.
With it looking likely that the Federal Reserve will hike interest rates again this week, it's tempting to matter-of-factly declare that this will mean good news for savers. And the odds of that correlation are certainly better than even.
But since we have two recent hikes in our rearview mirror, and have tracked comprehensive rate data before and after each increase, we decided to do a deep-dive into the numbers to find out exactly what has – or hasn't – materialized for savers since the Fed's rate emerged from the cellar.
To see if and how average yields changed after each Fed hike, and how many institutions made a change, we sliced and diced historical rate data from approximately 7,000 banks and credit unions in our database, across four deposit products: savings & money market accounts, short-term certificates of deposit, mid-term CDs, and long-term CDs. We also drilled down to analyze the impact among different institution types – brick-and-mortar banks, internet banks, and credit unions – as well as whether national players exhibited more or less change than local and regional institutions.
What we found is that there's no singular answer to the motherload question of whether the rising Fed tide has lifted consumer boats yet. In a handful of comparisons, sadly little has changed, even fourteen months later, while in other juxtapositions we did discover modest improvements. Add in other findings where we unearthed a significant positive acceleration after the second hike, and still others where the overall results are worse than flat – they're negative.
In other words, it's a mixed bag so far, and we'll lay out the full array of our pre- and post-Fed hike findings for you below. But before digging in, let's review a quick nutshell of rate history.
A throttle, a dry spell and a slow climb out
As most of our readers know, the Federal Reserve tanked interest rates in 2008 as a way to apply the brakes to our economy's deepening financial crisis. It did this by dropping the federal funds rate to near-zero, which is the interest rate commercial banks pay when they borrow money from each other through the Federal Reserve system.
The federal funds rate impacts savers because, when banks can get all the money they need from almost-free loans through the Fed, they have precious little incentive to pay a decent rate to attract consumer deposits. And that's exactly what we saw happen during the Great Recession – savings, money market, and certificate of deposit yields that sank right along with the Fed's rate.
To the dismay of savers everywhere, the Federal Reserve kept its rate tethered to the floor for a painfully long seven years, making no increases until December 2015. To say that first move was anxiously awaited would be a significant understatement, but unfortunately its arrival didn't spell the end for savers' disappointment.
At the time of the first hike, the Fed said it expected to make four more increases in 2016. But given global market turmoil and a still-absent healthy inflation rate, eleven and a half months of last year passed before the Fed's rate-setting committee finally delivered Hike #2.
That brings us to today, where we now have ample data to compare what rates looked like before the first hike and a reasonable time afterward, and then repeat the analysis for last December's hike. So let's wade into the details.
Methodology nuts and bolts
With our technology conducting daily rate tracking from thousands of institutions, across multiple products, our first task was to boil down the analysis to something digestible. We targeted liquid deposits by looking at savings and money market accounts as a combined category. And aimed to capture what has happened across the CD marketplace by segmenting it into short (1-year), medium (3-year), and long-term (5-year) instruments.
Since not all CDs conform to standard yearly increments, we defined CD terms as follows:
- 1-year CDs: all those with a term of one year +/- 1 month, so 11 to 13 months.
- 3-year CDs: all those with a term of three years +/- 3 months, so 33 to 39 months.
- 5-year CDs: all those with a term of five years +/- 5 months, so 55 to 65 months.
We narrowed the field to products available with a $1,000 deposit, and aimed to keep the analysis apples-to-apples by excluding all specialty products, such as IRA CDs, relationship rates, youth and senior accounts, and so forth. The result is a comparison of standard “plain vanilla” savings accounts, money markets, and CDs that virtually anyone can open (barring geography or membership limitations in the case of community banks and non-national credit unions).
Applying these filters established a pool of roughly 6,700 savings and money market accounts; 5,800 one-year CDs; 4,800 three-year CDs; and 3,900 five-year CDs.
For the time element, we pulled our rate data from four dates: one month before each hike and then two months afterward. Both rate hikes occurred in mid-December, so our analysis dates became:
- Nov. 16, 2015, and Feb. 16, 2016, for Hike #1
- Nov. 14, 2016, and Feb. 14, 2017, for Hike #2
This by chance lent our analysis a tidy benefit, in that the comparisons are essentially year-to-year. Though deposit products don't generally exhibit seasonal rate effects, the Fed announcing both increases at the same time of year eliminates any possibility that seasonality played a role in our findings.
How many institutions boosted rates?
The first question we asked was, how many institutions improved their rates after either of the two Fed hikes? We looked at it from all angles: across all four product types, to see what kinds of deposits saw the most benefit, and across institution types, to see if different kinds of banks and credit unions were more or less likely to raise rates.
What we found is that the vast majority of institutions – no matter the type or product – left rates unchanged. Across savings and money market accounts and all three CD terms, 83 to 95 percent of institutions held rates steady after the first hike. The experience was only slightly better after the second hike, with 81 to 94 percent leaving yields untouched.
As you can see below, savings and money market accounts fared worst by far, with a paltry 3 percent of institutions raising these liquid rates the first time around. Even after the second hike, savings and money market accounts still remained largely neglected, with just over 4 percent of institutions making an improvement.
Institutions were almost four times as likely to boost their CD yields. After the first hike, roughly 12 to 13 percent of institutions had raised their 1-, 3- or 5-year rate, with 3-year certificates receiving the most increases. After the second hike, rate bumps were seen from 14 to almost 16 percent of institutions, and this time favoring 5-year CDs.
Next we dug into the same data but segmented by institution type, to see if brick-and-mortar banks, internet banks, and credit unions behaved differently in response to the rate hikes. And indeed they did, with myriad variations. You can see the detailed results in the figure below.
Perhaps unsurprisingly, internet banks were in almost all cases the most responsive, and especially so in the wake of Hike #2. After the first Fed increase, the percentage of online banks that raised rates modestly outpaced physical banks and credit unions for all product types except 5-year CDs, where credit unions forged ahead more quickly. But once the second hike settled in, the share of online banks that became “raisers” surged, with more than 27 percent of internet banks boosting short- and long-term CD yields. And while their exuberance for raising 3-year CD rates was more tepid, almost four times as many of them increased savings account rates after the second hike than after the first.
Meanwhile, physical banks were the least responsive after Hike #1, with only 10 to 12 percent adjusting their rate sheets upward for CDs, and less than 3 percent for savings and money market accounts. But on the heels of the second hike, brick-and-mortar banks showed rate improvements in significantly increasing numbers, registering more increases across the board than credit unions.
While both types of banks seemed to follow a “wait and see” approach, acting more conservatively after the first increase and then amping up their increases in light of Hike #2, credit unions were more steady movers. In all product categories, the percent of credit unions that raised rates after the first hike varied little from the percent that improved yields the second time around.
We can also note some differences in the products that each institution type favored. Physical banks initially smiled more upon 1-year CDs, but later evened out their increases across the CD terms. Internet banks first favored 3-year CDs, but have since upped the ante for 1- and 5-year CDs. And credit unions have consistently shown a preference for raising long-term CD yields.
How did average rates fare?
That the vast majority of institutions left their rates untouched in the wake of either Fed hike foreshadows how much (or how little) the yield averages changed over each period. And indeed, after averaging more than 20,000 rates for four different dates, we found little upward momentum when looking at the full slate of institutions.
As you can see below, gains were virtually non-existent for the most liquid of accounts, inching up less than a basis point for savings and money markets on either side of two hikes. When you extend those average rates by another decimal point, they moved from 0.163 to 0.166 percent after Hike #1, and 0.168 to 0.172 percent after #2. In other words, over fourteen months the average rate moved less than a full basis point. In my book, I'd call that flat.
Average CD yields did see a bit more improvement than the liquid accounts, but still nothing worth celebrating. For all three terms, the average moved up two basis points after the first hike. And 1-year certificates saw a similar 2-basis-point improvement after the second hike. Three- and 5-year CDs saw a bit more positive movement after the second increase, both up 4 basis points. But because they stayed flat or even dipped between the two hikes, the overall gain for all three CD terms was just 5-6 basis points over the 14-month span.
We also parsed the rate averages for seven major categories of institution types: first physical banks, internet banks, and credit unions; then national versus regional banks; and finally national (easy access) versus restricted membership credit unions. The detailed data can be found in four charts below.
Internet banks were again the strongest performers, but only if you look at average rates. In contrast, their gains over the 14-month period were not especially robust, rising just 2 to 5 basis points across three product types and actually dropping 7 basis points for 5-year CDs. National banks exhibited a similar pattern of rising 2 to 7 basis points for most product types, but declining 6 basis points for long-term CDs.
Compare that to national easy-access credit unions. Though they have slightly lower average rates, their increases after two Fed hikes were 6 basis points at their most modest, and for savings accounts and 1-year yields, average rates increased more than 10 basis points.
Averaging the Top 10 rates
But even if you're looking at the winningest rates above, these are still just averages of a large pool, or put another way, middle-of-the-pack returns. And of course, savvy savers don't shop average rates. So lastly in our analysis we looked at how the Top 10 nationally available bank rates in each category fared, and how much the average of those 10 “best in class” yields improved. We then also repeated the analysis for the Top 10 nationally available credit union rates in each product category.
If you're expecting the Top 10 averages to show the biggest gains, you'll be disappointed. Indeed, among savings accounts and long-term CDs – the two ends of our spectrum – the average Top 10 rate a month ago was worse than before the Fed announced Hike #1. Only in the middle terms are the Top 10 rates better now than 14 months ago. For 1-year CDs, they gained significantly after the first increase, but have faltered since. And among the ten best 3-year CDs, we saw little improvement surrounding the first hike, and then a decline between the hikes. But Hike #2 has given the Top 10 3-year CDs a shot in the arm.
The pattern is almost opposite when looking at the Top 10 nationally available credit union rates. Where nationally available bank yields are down for savings/money market accounts and 5-year CDs, they are decidedly up in both those categories among the nation's “easy access” credit unions. And while rates on 3-year CDs are up among nationwide banks, that term has declined among the nationally available credit unions. Perhaps the biggest takeaway is that the Top 10 easy-access credit unions have responded with rate increases most significantly for liquid and short-term accounts, exhibiting double-digit growth rates over the 14-month time period.
That said, not all of these rates responded well to the Fed's hikes. Savings rates remained essentially flat, and 3-year CD averages are a full tenth of a point below where they sat before the Fed's first increase. But where they faltered in those categories, they gained about a tenth of a point among 1- and 5-year certificates.
What we have not attempted to measure here is any impact from other economic or market factors other than the Fed rate hikes. But by setting tight boundaries before and after each hike, and excluding the inactive between period from our analysis, it's a reasonable estimation of how much, or rather how little, the Fed increases have driven rate sheets upward. What we've experienced is that two hikes have had a middling effect – positive movement in some areas, flat lines in others, and even some unexpected downturns. If the Fed boosts rates again this week, in a couple of months we may start to see more uniform patterns emerge, as the cumulative effect of multiple Fed moves – and reasonable expectations of more to come – begins to gain a stronger foothold.