Are interest rates ready to turn around? Based on the predictable cycle of interest rates our expert analyst, Dr. Dan Geller, thinks that it might be time for interest rates to shift. Read his latest analysis posted on BAI’s Banking Strategies.
Twice in the past twenty years we experienced a cycle of decrease and increase in the Fed funds rate. In both cases, the Fed increased the funds rate by 25 basis points (bps) 12 months after the national average rate of deposits reached its turning point, or the point at which the national average rate ceased to decline and began turning upwards.
This turning point of deposit rates can be tracked by a variance analysis, which measures changes in the national average rate for deposits on a monthly basis. When the analysis shows a gradual decline in the rate variance, it means that the national average is nearing its turning point. When the variance reaches 0.00, no further decrease in the national average rate from the previous month to the current month has occurred, thus signaling a turning point.
Intuitively, people might think that interest rates on deposits follow increases in the Fed funds but the reverse is actually true; the Fed increases the funds rate after an initial increase in deposit rates. Why? Because the Fed constantly monitors multiple economic indicators, one of which is lending activities. When loan demand increases, it suggests an economic expansion related to housing, automobiles, business growth and hiring. Financial institutions respond by building up needed liquidity to fund these loans, which in turn creates higher demand for deposits and therefore higher deposit rates.continue reading »