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No presents in savers’ stockings this year

By Claes Bell · Bankrate.com
Thursday, December 17, 2015
Posted: 5 pm ET

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On Wednesday, savers may have felt a little bit like kids on Christmas Eve. Finally, the Federal Reserve hiked rates to save them from the puny yields they've been suffering through since before Barack Obama moved in to 1600 Pennsylvania Ave.

A few hours after the hike, banks had already announced higher benchmark rates for variable rate products like credit cards and home equity lines of credit. But Bankrate's overnight averages for standard short-term savings products have failed to budge. The 1-year CD rate is unchanged compared to last week, and the MMA/savings rate is actually down compared to last week.

What gives? How can the deposit pricing elves be so very cruel at this most special and heartwarming time of year? What have you done to deserve this despicable lump of coal in your risk-free return stocking?!

Sadly, expecting banks to pay more for your money just because they're getting more from theirs, like putting a pony on your Christmas list, is setting yourself up for disappointment.

Why banks are feeling grinchy

Think of a bank as a factory. In one side goes your hard-earned deposits, and out the other side comes consumer loans, commercial loans and other assets they either hold or sell to investors to make their money.

The banks have just seen the price they get to charge for their finished goods increase, yes. But expecting them to voluntarily pay more for the raw materials they use to make those products probably isn't realistic. Imagine the price of luxury cars goes up -- does Mercedes then increase the price it pays for steel just to … I don't know, share the wealth or something? No.

Banks will raise rates on deposit accounts when, and only when, the market forces them to do so. In many ways, cash is a commodity like any other -- when it's scarce, its value goes up. When it's plentiful, as it has been for some time thanks to the Fed's economic stimulus efforts, its value goes down. As the Fed begins to tighten up the money supply, some banks that need more consumer deposits to produce loans will be willing to pay a higher rate, and some sellers of those raw materials, depositors, will take their business to higher-paying banks. Banks that pay lower prices for raw materials will see their supplies dry up and will be forced to pay more if they want to keep their assembly lines going.

Don't give up, though! Shop Bankrate for the best high-yield CD rates.

No higher yields under the tree this year

That's how it works. But there are actually some factors that suggest to me that this time it will take even longer for Fed rate hikes to be reflected in higher deposit rates because of the way those hikes are being engineered. Bear with me, because this is going to get a little wonkish.

Usually, when the Fed hikes rates, it does so by raising the rates banks charge one another overnight to borrow money at the Fed, mostly to help them meet their daily reserve requirements (the minimum amount of cash they need to have on hand relative to their deposits). That rate is known as the federal funds rate, and changes to it usually filter down pretty quickly to yields on savings.

But the Federal Reserve flooded the banks with so much cash during the recovery that banks mostly don't need to borrow money from one another to meet those requirements anymore, so increasing the federal funds rate alone won't do much to help savers or raise the effective interest rates banks actually pay. The alternative way the Fed has come up with, which involves putting a floor under rates by paying banks and other financial institutions a higher rate of return on cash and risk-free assets, probably won't filter down quite as quickly.

Eventually, in the face of repeated Fed rate hikes, banks will eventually offer higher rates on deposits. But definitely not in time for Christmas.

What do you think? Do you expect higher rates anytime soon?

Follow me on Twitter: @ClaesBell.

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