Rising interest rates were a hot topic last year as the Federal Open Market Committee (FOMC) raised interest rates for the Federal Reserve System, the central bank of the United States. Many business owners wonder what rising interest rates mean for their business in terms of loan interest rates and savings and wonder why increases in loan interest rates don’t not reflect increases in savings rates.
Jon Stewart, retail team leader, Coastal Community Bank, said he speaks to customers daily about their questions about interest rate increases. “Clients often ask why savings interest rates do not increase in the same way as lending rates, and how the increase in the federal funds rate (federal funds) affects the interest rates of home loans,” he said. “I’ve been in banking for a long time, and it’s understandable that even the most knowledgeable would ask questions like these, because historically interest rates have acted differently.”
Why aren’t savings rates rising as much as loan rates?
Stewart explained that generally, as the Federal Reserve moves the federal fund up and down, financial products that are variable and tied to some sort of agreement or contract are also likely to move immediately. For example, variable rate loans and certificates of deposit are linked to a particular index such as the federal funds or the prime rate, and their rates move accordingly.
However, Stewart explained that when it comes to raising or lowering other deposit rates, it depends on the individual bank and how it manages its balance sheet (loans and deposits) and the type of loans. that she offers. Banks that offer consumer loans at higher interest rates may be more willing to pay more on savings accounts because the increased cost of that higher savings account is offset by the interest on the ready.
Why do some financial institutions offer special interest rates for savings accounts and others do not?
Stewart said customers ask him why they see CD promotions and special interest rates at some financial institutions while others don’t offer those promotions. “Some financial institutions will offer a much higher rate of return in the short term to attract new customers,” he said. “Other banks could raise their rates to stay competitive. As banks offer these rates, they will need to find ways to offset the increased cost of paying this higher interest rate. When the Fed lowers the rate, which it eventually does, it will still have to pay the same high rate on these accounts.
“It’s different now than it was in the past for a number of reasons,” Stewart said. “Savings rates have not increased at the same pace. In the past, banks raised interest rates on savings accounts to encourage people to keep their money in a bank’s savings account, i.e. a money market, certificate of deposit (CD) or a savings account, so that the bank can use the money to lend. The difference now is that banks have more deposits than before and don’t necessarily need more deposits to lend. Raising savings account rates is no longer as necessary as it once was.
What is the impact of the federal funds rate on mortgage rates?
“This is where it gets confusing and complicated,” Stewart said. “The federal funds rate is just one of multiple factors in mortgage interest rates and influences short-term, variable-rate mortgages that revalue more frequently.” He further explained that longer-term fixed-rate mortgages tend to be influenced more by 10-year cash flow, the yield curve and longer-term inflation expectations.
Stewart said every business and financial institution has different goals and needs, and increasing and decreasing rates can have an impact. He encourages companies to speak to their banker about any questions regarding the rate environment and how they can work with them to help them plan in the current economic climate.
Jon Stewart is Vice President, Retail Team Leader at Coastal Community Bank. For more information, contact a banker at one of 14 local Coastal branches. www.coastalbank.com FDIC member. Equal Housing Lender.
