The New York Fed has found that there is a record gap between the interest rates that banks offer on customer deposits and the Federal Reserve’s benchmark. At the end of the fourth quarter of 2022, there was a 2.3 percentage-point difference between the average savings deposit and the Federal funds rate, the largest gap on record. This means that American savers are not seeing much benefit from the Federal Reserve’s aggressive interest rate hikes over the past year. The gap between the deposit rate and the Fed funds rate has driven a big outflow of deposits from banks to money-market funds. However, customers may want to wait before pulling their cash from savings accounts, as deposit interest rates could surge for the rest of the year as the gap to the Fed’s benchmark starts to close. News of the big difference between deposit and Federal funds rates comes at a time when regional banks are already reeling from the turmoil caused by the collapse of California lender Silicon Valley Bank in March. But customers might want to wait before pulling their cash from savings accounts. Deposit interest rates could be set to surge the rest of this year as the gap to the Fed’s benchmark starts to close, according to the researchers
According to the researchers, customers may want to wait before pulling their cash from savings accounts as deposit interest rates could surge for the rest of the year as the gap to the Fed’s benchmark starts to close. This means that banks may start to offer better rates to their customers in order to compete with money-market funds, which have been attracting record amounts of cash due to their slightly higher yields on short-term, low-risk debt securities. While regional banks are already facing difficulties due to the collapse of Silicon Valley Bank, the potential for higher deposit interest rates could provide some relief.