The Pandemic's Plunging Rates
Banks have been slashing deposit interest rates since the pandemic began. Even banks with traditionally low interest rates are keeping their next to nothing rates low. This was a move banks made following the Federal Reserve’s drop in interest rates as a result of the coronavirus pandemic. The Fed slashed their primary credit rate 1.5 points to 0.25%, effective on March 16th, 2020. However, this rate cut hasn’t deterred consumers from depositing their money in banks; total U.S. deposits at commercial deposits have risen to about $15.9 million as of November, compared to $13.2 trillion at the beginning of 2020.
The coronavirus pandemic has been the primary catalyst for rate decreases for both commercial banks and the Federal Reserve. As a result of the mass unemployment caused by shutdowns, congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), an economic stimulus package designed to support the public and businesses after the economic downturn caused by the pandemic. Part of this package was sending out stimulus checks to individuals making under a certain threshold. Much of the early wave of deposits in the spring were from individuals with balances under $2,500, whose deposits increased by 66% from mid-April to late May. This growth occurred because of the stimulus checks, but the trend has since shifted; beginning in June, customers with balances over $5,000 were depositing at a more frequent rate than other customers. The rate of deposits has since stabilized- however deposits still remain at an all time high.
The influx of money from these checks, and people's desire to save in such a tumultuous and uncertain time, has caused the massive increase in deposits. The destination of these deposits is disproportionate; more than ⅔ of the deposits are going to the nation’s 25 biggest banks. Larger banks tend to keep their rates low regardless of economic circumstances. These banks, including JP Morgan Chase, Bank of America, and Wells Fargo, draw in customers for other reasons, including convenience and advanced technology. Digital first banks, such as Ally and Goldman Sachs, previously used attractive interest rates as their primary appeal. They too, however, have since dropped their rates from 1.6% to 0.5%.
The number of people taking out loans has dropped significantly, so banks have no use for this large quantity of deposits. Banks have more money than they know what to do with. Their only solution is to lower rates and hope people take their money elsewhere.