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A Look Back at Rate Behavior Leading up to the Fed Hike

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The following post is from our analyst, Rodney, and is part of an ongoing series of articles that seek to take a deeper and more concerted look into what we can glean from our proprietary database of depository banking information….

In the wake of the 2008 banking collapse, consumers enjoyed seven years of favorably low interest rates on loan products and have endured painfully low rates on deposit products thanks to the Fed’s Zero Interest Rate Policy (ZIRP). Questions lingered during that time regarding when rates would bottom out and start to climb again. The policy came to an end a few weeks ago when the rates were finally raised by .25%, prompting what should be the beginning of rising deposit rates. With ZIRP finally in the rear view (hopefully for good!), we thought it would be an interesting exercise to perform a statistical look back at the activity of rates over the last few years.

The Analysis

We dug through the annals of recent rate history in our proprietary database to study the movement of rates on the most popular consumer products over the last five years—CDs, Savings, Money Market, and Checking accounts. The research spanned the time between January 2011 and December 2015.

As expected, the deposit rates across all products displayed a steady downward trend through at least mid- to late-2013, some into and through 2014. Though some amount of disparity exists between the products, they all bottomed out during that time and either began an upward climb or seemingly settled in to wait for the looming rate hike. Here is a look at the activity of the 5 CD products:

CD Products Average APY: January 2011-December 2015

As the chart reveals, similar activity can be seen across the CD products, as they each reach their low point and slowly turn northward. The shorter-term CDs were slower to turn, while the 5 year CDs turned the quickest, which is sensible, considering the longer term utilization of funds (and cost of funds expectations) for a 5 Year CD over that of a 1 Year CD and the need to attract depositors willing to make such an investment.

The other deposit products were slower to bottom out and turn than the CDs. Personal Checking rates did not bottom out and begin (very slight) upward motion until the first months of 2015:

Personal Checking Average APY: January 2011-December 2015

Personal savings, on average, bottomed out in the spring of 2015 and settled into place, with only slight ups and downs through the end of the year. Money Market rates reached their low around the same time and fluctuated slightly, but, for the most part, held steady through the end of the year leading up to the rate hike:

Personal Savings/MMA Average APY: January 2011-December 2015

Similarly, Rewards Checking accounts hit their low point in the early spring of 2015, and very slowly began a slight northward climb through the end of the year:

Reward Checking Average APY: January 2011-December 2015

Internet Banks

The above results are inclusive of all financial institutions (traditional banks, credit unions, internet banks). We thought it might be interesting to extract the internet banks from the other institutions for a deeper look at their activity over the same time period. The results were, in fact, interesting. All of the CD products for internet-only banks hit bottom sooner than the above averages. Whereas the averages for CDs explored above bottomed out over the course of six months or more (mid-2013 to early-2014), the internet bank CD products all hit their low point in May or June of 2013 and began a slow climb upward that steadily continued through the end of 2015. Far more volatility in the internet CD rates also existed during the decline than in the overall averages (in part due to a smaller sample size), as well as a generally higher average rate for the internet-only banks’ CDs:

Internet Banks CD Product Average APY: January 2011-December 2015

Internet-only checking rates mimicked the same pattern, hitting bottom months before the above numbers, and averaging at least twice the APY of the above averages throughout the majority of the last five years:

Internet Banks Checking Average APY: January 2011-December 2015

We saw similar results in internet savings rates, while money market rates have been slower to reverse course:

Internet Banks Savings/MMA Average APY: 
january 2011-december 2015

A Little Historical Context

The DepositAccounts database only goes back so far, so we looked for outside input in order to go back a bit further and provide some historical context. The Federal Reserve Bank of St. Louis has charts, graphs, and information going back decades on several products. Just to remind us all how far deposit rates had dropped in a historical context, the following chart is a glance at the rate movement of 6 Month CDs on average from 1964-2013 (tracking was discontinued in 2013 before the bottoming out). Depositors will likely need a moment for nostalgia when taking in these rates; nevertheless, here they are:

6 Month Certificate of Deposit

The Coming Months

All of the deposit products we researched either bottomed out and began slight increases or bottomed out and settled in, seemingly awaiting the impending Fed rate hike. The next few months will begin to tell the tale of the results of the hike on deposit products. Here is some commentary on expectations and strategies for the coming months, and we’ll plan on tracking any rate movements and checking back with periodic future updates in this ongoing series.

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pua   |     |   Comment #1
Thanks for this outstanding article.  As a scholar, I appreciate its breadth and the depth of its statistical analysis.