Fear May Still Drive Deposit Decisions
With deposit rates for products such as money market accounts expected to remain low this year, consumers may continue to react based on the economy's uncertainty.
According to a report on bank deposit trends and projections from research firm Market Rates Insight, low deposit rates could be tied to the Fed Funds rate, which is expected to remain at its current level in the near term.
Traditionally, deposit rates mirror fluctuations in the Fed Funds rate, which rises when inflation increases and vice versa, MRI said. The high unemployment rate, however, will likely delay any near-term rise. A similar scenario occurred after the recession of 2000, when the inflation rate increased from 1.07% in June 2002 to 3.02% in March 2003 yet the Fed Funds rate did not rise right away, which caused deposit rates to remain low.
"In 2011, the average consumer is going to make deposit decisions based on emotions, mainly fear due to economic uncertainty" said Dan Geller, executive vice president at MRI.
Deposit balances will continue shifting from term to liquid accounts, Geller said. Dropping deposit rates have reached a point of minimal yield differentiation between some term accounts and liquid accounts, which will trigger a shift of balances from CDs to MMA, savings and checking accounts. Volatile equity market may also make some consumers nervous about alternative investments despite the potential for higher returns, MRI said.
"The memory of the losses in 2008 is still fresh. Also, the extension of the Bush-era tax cuts will positively impact deposit balances due to the very strong and significant relationships between disposable personal income and savings," according to MRI.