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Deposit rates are simply the rates paid by a financial institution to a deposit accountholder (think certificates and savings accounts). Things are generally quiet when deposit rates rise; however, when rates fall (as we experienced over the past year) there are often increased concerns from those on fixed incomes and conservative retirement or investment strategies.
Below is a brief overview of how deposits are priced. This knowledge is especially helpful when trying to understand the dramatic reductions which occurred due to the pandemic’s impact on financial markets.
Deposit Rates Pricing Criteria
The Federal Reserve
The Federal Reserve Bank is part of the central banking system which establishes monetary policy and provides financial institutions deposit accounts and other financial services for excess funds. Rates paid on those funds are in correlation to the Federal Discount Rate which is currently close to zero.
Competition at national levels and within local financial markets between credit unions, banks, brokerage firms, and fintech companies can also impact deposit rates.
Past and Present
Deposit rates have always been cyclical in nature and have decreased slightly over the past three years, but competitive pressures and vast economic growth in businesses and housing kept longer-term deposit rates higher.
Enter March 2020, the global pandemic impacted financial markets to their core and resulted in government lockdowns, business and school closures, and shelter-in-place orders. This was followed 90 days later with attempts to avoid a total economic collapse by cutting Federal Reserve discount rates to essentially zero and adding two large stimulus packages into a stunted economy.
As a result, financial institutions saw a large influx of cash, commercial and consumer demand for loans essentially stopped because of job losses and economic uncertainty, and alternative market investments had increased risk or were extremely limited.
With excess supply and no demand for loans, financial institutions had no choice but to dramatically lower deposit rates to reduce their interest costs and lack of reinvestment opportunities while formulating alternatives to keep deposit relationships.
Stay engaged and recognize rates are cyclical and subject to change at any time. Rates may be low now but understand your deposits are federally insured and have no risk of principal loss provided adequate NCUA coverage levels are maintained. Plus, there are various ways to extend insurance coverage beyond current limits based on account ownership.
At General Electric Credit Union (GECU) we are committed to sharing insight into current economic changes and conditions so you can understand how they may impact your family financially.
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