Consumer Confidence Delivers Body Blow to Markets -- and Bank Rates

Consumer confidence -- or the lack thereof -- took center stage yesterday, as an unexpectedly low reading led to a sharp sell-off in the stock market. As with any sign of economic weakness, this could delay the recovery of bank rates.

The Conference Board takes a monthly survey of consumer confidence, and the February reading saw the index level drop from 56.5 to 46. The consensus expectation was for a mild drop to around 55, which is why the stock market reacted so severely to the actual release.

While the immediate impact was felt in stocks, this news also affects bank rates. Things like CD rates, savings account rates, and money market rates won't begin to rise until economic demand strengthens. In particular, increased borrowing would be a key factor in encouraging banks to offer higher rates on deposits, and the consumer confidence figures show little appetite for borrowing among consumers.

If there is a silver lining in this, it is that caution on the part of consumers could ultimately lead to a longer, more fundamentally sound recovery. After all, much of the economic growth in the past decade was based solely on increased borrowing, a trend which reached its limits and resulted not only in a recession, but in a financial crisis triggered by bad debts.

Over the course of the recession, consumers have been rebuilding their balance sheets. In the long run, that could set the stage for more solid financial growth. In the meantime though, that is cold comfort for depositors who've already waited long enough for higher bank rates.

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