The Impact Of Supply And Demand Upon Savings Rate

We often discuss the impact of the Federal Reserve monetary policy decisions upon interest rate. However, there is another factor which seems to be exerting further downward pressure on interest rates; and that is the simple economic law of supply and demand. A recent survey of more than 1,000 people from Bankrate found that just over half of respondents place a higher priority on growing their emergency savings , an increase of 7 percentage points from last year. About one-third of respondents said paying down debt was their top priority, a decrease of 6 percentage points. While it is an excellent financial practice to establish emergency savings; the fact that more dollars are going to saving accounts--irrespective of interest rates--means that banks and credit unions have little incentive to raise their savings and CD rates. When the Fed finally does start raising interest rates down the road; we will want to keep an eye on this metric of savings account prioritization. Hopefully as the pandemic wanes; the savings metric noted above will revert to baseline levels so it will no longer exert downward pressure on savings rates.