Presidential Election Is 'Confusing' Deposit Pricing

 

By Ray Birch

LAKE FOREST, Ill.—The nation is experiencing an economic period that’s testing the deposit pricing skills of even the most accomplished CFOs, one economic research firm is saying.

And the reason: erratic movements in deposit pricing since COVID, and a presidential election whose outcome could swing rates two ways.

“The pending election is confusing deposit pricing for both user and FI,” said Elizabeth Hamlin, financial analyst at Moebs $ervices. “The two candidates for the White House, plus House and Senate races, tell the story. The average American is confused about who is saying what and who will win. And, this confusion lies with even those who run depositories and determine deposit pricing.”

Hamlin pointed out that 12-month CD rates have dropped 80 basis points in the past year, while three-month CD rates have increased 64 BPs.

“The depository saver is confused,” Hamlin said. “For some savers this money is going short with the hope rates will rise after the election, while other savers are going long because their view is rates will go down. Thus, deposit pricing chaos.”

The latest Moebs $ervices Deposit Rate Survey, from October 2024, representing 74.8% of financial institutions with consumer deposits, provides insights, Hamlin said.

“After more than two years, the U.S. Treasury yield curve is no longer inverted,” Hamlin explained. “The deposit yield curve is a different story, neither normal—upward sloping nor inverted. Deposits are in transition to a new norm.”

A year ago, rates started to move from an inverted state, with 12-month and 24-month CDs dropping the most and leading the way lower.

Rates Have Zig-Zagged

“Yet, the conclusion of many a year ago was deposit rates would be headed upward,” said Hamlin.

However, over the last three years, most deposit rates have zig-zagged, Hamlin said

Savings, now an M1 transaction account, along with MMDAs and 48-month CDs, stayed the same.

In contrast, usage—volume in each category— increased significantly for 36-, 48-, and 60-month CDs. Usage dropped for other transaction accounts with interest and free checking dropping.

“This is unusual,” noted Hamlin.

Usage for one- and 24-month CDs, along with money market deposit accounts and free checking, was minimal.

Hamlin addressed pricing differences among deposit types.

Elizabeth Hamlin

“The BPs differences are pronounced,” noted Hamlin. “The 12- and three-month CDs show a wide variance and are strikingly different. As Fed Chair (Jerome) Powell decreased fed funds by 50 BPs, depositories increased the thee-month CD sharply while lowering the 12-month CD even more—and both moved more than 50 BPs.”

In contrast, three-, four- and five-year CDs, along with MMDAs and interest checking, show little change.

“Rates are on the move. Depositories can look to the Treasury rates for guidance in how to protect funds without overextending,” Hamlin said.

Contrasting Treasury Rates

T-rates also decreased with the fed fund rate adjustment in September, Hamlin noted.

“The result is a normal yield/rate curve for fed funds up to one-year bills, then falls for longer terms,” Hamlin said. “Also, CDs as a percentage of T-rates rose for all by 5%, as banks, credit unions, thrifts, and fintechs move to keep deposits more closely mirroring the Treasury rates. The Fed now has a good grip on money supply and is moving to align all government rates to a normal yield curve. Depositories are aligning closer to the Fed more than ever.”