One Year of Zero Rates - Deposit Rates of 2009 vs 2020
Today marks the one year anniversary of zero rates. At an emergency meeting on Sunday, March 15, 2020, the Fed slashed the target federal funds rate to the effective lower bound of 0.00%-0.25%. This was one of many policies the Fed implemented to help the economy make it through the pandemic.
I thought it would be interesting to compare this first year of zero rates with the first year of zero rates that took place from December 2008 to December 2009. That period was right after the 2008 financial crisis. The Fed lowered the target federal funds rate to the effective lower bound (0.00%-0.25%) on December 16, 2008. This began a long period of zero rates that didn’t end until seven years later on December 16, 2015, when the Fed finally raised the target federal funds rate by 25 basis points.
How long this new zero rate period lasts will depend on many factors. The primary factor will be how the US economy recovers and how the Fed chooses to respond.
One thing that can be quickly seen in this comparison is that this zero rate period is much worse than what savers experienced after December 2008. Compared to 2008, deposit rates in the last year have fallen much faster and to much lower levels.
Why have deposit rates fallen much lower this time?
Here are a few reasons in my opinion:
- Banks received record deposit levels in the last year due to the government checks and lower leisure spending. The banks didn’t need deposits and were free to lower deposit rates.
- Loan balances at banks shrunk as banks tightened their lending standards and consumers and businesses reduced their loan balances. Falling loan-to-deposit ratios at banks lowered demand for deposits.
- Deposit rates started at a lower level. The Fed’s last rate hiking cycle brought the target federal funds rate up to only 2.25%-2.50%. That was much lower than the peak of the last cycle that lasted from June 2006 to September 2007 (5.25%).
- The Fed has implemented a new inflation framework that is believed will keep rates lower for longer.
- Treasury yields fell to record lows in the last year. This was especially the case on the long-dated yields. That put pressure on banks to lower their CD rates.
Comparing the two first years of zero rates
In my comparison between the two years, I decided to look at rates most interesting to savers. I decided to compare deposit rates at three popular online banks that have histories that extend back before 2008. The three banks I chose were Ally Bank (used to be GMAC Bank), Discover Bank, and Capital One (the online division used to be ING Direct). The three deposit products that were compared were savings accounts, 1-year CDs and 5-year CDs. In some cases, the rate came from the bank’s money market account instead of its savings account when the savings account didn’t exist or wasn’t the primary savings product. The table below lists a total of nine deposit products from these three banks.
To compare the two first years, I looked at the rates at the start and at the end of the zero rate years. The first zero rate year was from December 2008 to December 2009. The second zero rate year that we just finished was from March 2020 to March 2021. The rates from these four dates are in bold in the table.
I also included the high and low rates from each of the two cycles. Deposit rates generally reached a peak in the first cycle during the years of 2006 and 2007. For the last cycle, the rate peak was late 2018 and early 2019.
Deposit rates generally reached a bottom in the first cycle during the years of 2012 and 2013. For this current cycle, we’ll have to wait before we know when the bottom has been reached. I sure hope that the bottom has been reached, and rates will rise going forward.
Comparing the Current Rate Cycle with the 2004-2015 Rate Cycle
|Cycle #1 (2004-2015)||Cycle #2 (2015- ? )|
(Dec 2008 to Dec 2015)
(Mar 2020 to ? )
|High 2006/07||Dec 2008||Dec 2009||Low 2012/13||High 2018/19||Mar 2020||Mar 2021|
|5-year CD||5.65%||4.90%||3.10%||1.50%||3.10%||1.75%||0.85%||Discover Bank|
|5-year CD||5.75%||4.89%||3.30%||1.50%||3.00%||1.80%||0.60%||Capital One/
Interesting observations between these years:
- Current savings account rates are around one fourth to one third of the rates that existed after the first year of the first zero rate period.
- Current savings account rates are around one half of the rate bottoms of the last cycle.
- For 5-year CD rates, Ally and Discover rates were equal or higher in December 2009 (one year into the first zero rate period) than they were in 2018/19 (the peak of the current cycle).
With the widespread vaccine program underway and with massive fiscal spending, the economy may experience a fast recovery this year. That reduces the chance that zero rates will last seven years like the last zero rate period. However, the Fed’s new inflation framework may cause the Fed to hold rates near zero for a longer period of time. If the Fed is unable to prevent bond yields from increasing, a recession could result that will keep deposit rates low for many years. The worst case for savers would be an economy with high inflation and low deposit rates. Then there’s a risk of higher taxes that will eat away at savings.
The Fed meeting this week will provide clues about the Fed’s outlook on the economy. In addition to the FOMC statement and press conference, this meeting will include the Summary of Economic Projections (SEP). That will include economic forecasts and federal funds rate forecasts. The expectation is that the economic forecasts will be upgraded due to the positive news on the vaccines and fiscal stimulus. Due to these upgrades, we may see more FOMC participants anticipating a rate hike in 2022 and 2023.
Of course, the Fed’s forecast should be taken with a grain of salt. Their long-term forecasts have rarely been accurate. Only thing certain is the uncertainty of the future economy and future rates.
It's not even a close outcome. Both academic research and empirical evidence suggests that mid- to long-term, the best outcome has been with a 60/40 to 80/20 volatile vs. non-volatile diversification of one's investment portfolio.
Just to be clear - I'm not trying to “sell” anyone here on anything. Except perhaps common sense. And by the way - don't fight the Fed.
No such guarantees in life, my friend. That's the way the cookie crumbles and the ball bounces.
Don't forget banks (including the Federal Reserve) create money - it is that money that is a claim on economic goods. No one had to save that money before it came into creation. If holding money becomes another form of taxation, people will start trying to hold less of it and hold more other assets instead. Sooner or later the price level will adjust and/or some of that money will disappear.