The Federal Reserve has raised the Fed Funds target rate by 75 basis points to a target rate of 3.00% to 3.25%. This is the highest it has been since 2008.
The rate represents the third successive 75 basis point rate increase as the Federal Reserve moves desperately and late to try to get control of inflation in the US. The rate is now dramatically higher than it was at the beginning of 2022, at which point Fed Chairman Jerome Powell was still holding its target at 0 to 0.25% as part of its COVID-19 emergency stimulation measures.
More importantly, the Fed has sharply raised its Fed funds target for the end of 2022 and into 2023. Its target rate for the Fed Funds future rate in three months time is now 4.40% (versus earlier guidance of 3.40%), meaning we now have another 125 basis points or so of additional rate hikes in October, November and December. And, into 2023, the Fed will hold rates higher for longer to fight inflation.
As the Fed Funds rate increases and as liquidity is removed from the system, you should expect to see more competition for your cash. If you bank is not increasing its savings rate commensurately in order to stay competitive, consider moving to a more competitive online savings or money market account.
More than a decade ago, when GMAC Bank had just rebranded as Ally Bank, they ran a series of commercials designed to build the Ally brand around integrity of treating their customers equally, and not giving preferential treatment to new customers over existing customers. I’ve only been able to find a handful of these commercials on YouTube, but there were many more than these:
The commercials were outstanding. They set Ally apart as a bank that could be trusted to treat its customers fairly, and they also set a paradigm for the online banking industry which virtually all of Ally’s customers were forced to follow for more than a decade.
But, now as interest rates are increasing, some banks feel the need to attract new capital by offering new customers better rates than existing customers. This practice enables them to keep their cost of capital lower as rates rise. To be clear, it is perfectly legal to segment your market, but as Ally understood, it is just really bad business.
Here are four culprits who are at it already.
First, Flushing Savings Bank. This bank has been in the online space for quite a while and it operates IGoBanking, BankPurely and GiftsforBanking. The bank has a bit of a checkered history of moving rates around between the different banks in order to segment the brand (as does Emigrant Direct which does the same thing through the parent brands, MySavingsDirect and Dollar Savings Direct). Segmenting the market with different brands, however, is at least transparent. The IGoBanking and BankPurely brands have been increasing their rates, but the new rates are only available to new customers. I personally had been a customer for many years through one of the brands and when rates started to rise, I reached out and asked them to extend the new rate to me, and was invited to haggle for something midway) I obviously closed the account.
Second, Sallie Mae Bank. This bank has been competitive over the years, and this year as rates have started to rise, they’ve rolled out a whole series of No Penalty rates through a third-party broker that are much higher than those available to existing customers. I had been a customer for over a decade and when I asked them to make one of these products available to me, I received a curt email which made it clear that I was no longer valued as a customer.
Third, Goldman Sachs or Marcus or Goldman Sachs Marcus, or whatever they have decided to brand themselves this week, has been very competitive since the business was bought from GE Capital a few years ago, and always treated its customers very fairly. However, as rates began to increase in 2022, they decided to be competitive only for those customers who are hawking the bank to their neighbors and social media acquaintances (i.e., you only get their most competitive rate if someone signs up with your referral code). Those long-term customers who don’t have quite the following of a Kardashian are left out in the cold with an uncompetitive rate. Not exactly the kind of loyalty that you would expect from a brand like Goldman Sachs.
Ally’s ads of a decade ago were right! Banking is a people business and people expect to be treated fairly. We are in a rising rate environment and there are banks that are desperate for your hard earned capital. There is no reason to play gotcha and there is no reason to allow a bank that you’ve been loyal to for many years to give you anything but their best rate.
If that is happening to you, find a new bank here:
Did you have an experience where you were extended a lower rate than a new customer? Let us know below.
To absolutely nobody’s surprise, the Federal Reserve has voted unanimously to raise the Fed Funds rate by 75 basis points today, setting a Fed Funds rate target of 2.25% to 2.50%. The move follows a similar 75 basis point increase six weeks ago and is the Fed’s fourth move since beginning the year at a 0-0.25% target.
We’re still suffering from a Fed that held rates at zero for too long in the aftermath of the pandemic and then has moved too late and too slowly to address the inflationary pressures caused by Putin’s invasion of Ukraine.
While this will be the Fed’s last move until September, the Fed Funds rate is still likely to be at least one percent higher than where it is right now at the end of the year as the Fed tries to play catch up.
Savings and money market accounts will probably move up toward the new Fed target, although some well-known online banks are flush with deposits and are not moving aggressively. We have seen banks stall out, such as Purepoint which is still at 0.40% APY, in spite of having been one of the most aggressive competitors for your online deposits just three years ago! For this reason, it is important to regularly compare your online savings rate with the best rates here.
We’ve seen a lot of skepticism about savings accounts and the value of getting 2% on your money while inflation is burning at 9% plus. The difficulty in maintaining purchasing power parity underscores the insidious nature of inflation, and how important it is for the Fed to move still more aggressively to get it under control. And, while you may be losing purchasing power, a guaranteed 2% is a whole lot sweeter than anything we’ve seen for a while. It is well worth reaching for, especially in a bubbly environment where asset prices in the US are still stretched.
