Personal Finance Blog By MoneyRates - June 2010
June 30, 2010
As expected, the Federal Reserve announced last week that would leave its key interest rate unchanged, at a level just above zero. What was unexpected was a pledge to continue this low rate policy for "an extended period of time."
The context behind that pledge is the worsening economic picture -- a double-dip recession now seems a real threat. However, it is possible that the Fed's pledge, and even the low-interest rate approach in general, might be backfire and make the economic situation even worse.
In previous blogs and articles, MoneyRates.com has examined reasons why the Fed's low interest policy hasn't been working -- it amounts to "pushing on a string," or applying stimulus where there is no underlying demand. To say that the policy is actually counter-productive goes a step farther, but consider the following two points:
- Low interest rate policies reward borrowers and punish savers. However, there is little demand for borrowing, and little inclination on the part of banks to make loans. Meanwhile low interest rate policies keep CD rates, savings account rates, and money market rates down. This effectively takes money out of the pockets of the people who are in a position to spend -- people with savings. That missing money could be helping the economy.
- The pledge to keep interest rates low creates a lack of urgency. If you are trying to stimulate the economy, you want people to take action now. The fact that interest rates are at record low levels should help do that, unless you make a pledge that allows people to be complacent about the fact that those low interest rates will still be available in a few months. With its words last week, the Fed may well have created that complacency.
June 29, 2010
There's good news and bad news for consumers as banks comply with new Federal Reserve rules for overdraft fees.
The good news: Banks are simplifying their complicated overdraft fee structures, according to a June survey of the 15 largest banks by the Consumer Federation of America.
The bad news: Many are eliminating their lowest fees. The consumer group says Chase, Citizens/RBS, Regions, and US Bank have collapsed or done away with tiered fees. Chase, which used to charge $25 to $35, now charges a flat $34 overdraft fee. Wells Fargo eliminated its initial $25 fee and now charges $35 for every overdraft. The only big drop in fees was at US Bank, which cut its fee to $10 for overdrafts of $20 or less. Larger overdrafts cost $33. Previously, US Bank charged tiered fees of $19 to $37.50 each.
Checking Account Overdraft Fee Still High
The typical checking account overdraft fee still runs about $35 at big banks, with top fees ranging from $33 at US Bank to $37 at Citizens/RBS and Fifth Third Bank, according to Consumer Federation.
A few major banks -- Bank of America, Citibank and USAA -- have decided not to let their customers overdraw their accounts at the ATM or cash register. Chase doesn't allow overdrafts at the ATM, but it's marketing its debit card purchase overdraft coverage, Consumer Federation said.
The first phase of the new Federal Reserve rules go into effect in July when banks must get permission from new accountholders to charge overdraft fees on debit card purchases and ATM withdrawals. Starting August 15, they must get permission from current accountholders to charge overdraft fees on those transactions.
Beware that banks can still charge overdraft fees for checks, preauthorized electronic payments, and recurring debit card transactions without your permission.
If you want overdraft protection without big fees, ask your bank about linking your savings account to your checking account to cover overdrafts.
June 28, 2010
It's been a long time coming.
Following exhaustive debate, proposed banking legislation has been finalized and is expected to be put to a vote this week.
Coverage of the outcome of the conference committee process, which is the legislative procedure for reconciling differences between House and Senate versions of the same bill, has focused on the details of the final proposal, as if passage of the bill is merely a technicality at this point. That could be setting people up for a surprise.
Certainly, it is probable that the banking bill will pass, but it is not a slam dunk. Why? Because the conference committee went well beyond simple reconciliation in finalizing the bill. Given the partisan differences and special interests surrounding this legislation, the final vote could be more contentious than most people seem to anticipate.
In the end, what will probably tip the balance toward passage is the fact that with mid-term elections looming, there are many lawmakers who simply want to say they voted for banking reform -- no matter what the substance of that reform actually is.
Don't expect an immediate, dramatic impact. Indeed, recent legislation on credit cards and overdraft fees produced much more tangible changes for the consumer than this new reform bill is likely to. MoneyRates.com will publish more detail on the expected outcome of this bill if and when it passes, but keep in mind that a central intention of the new law is to make the financial system more stable. If it succeeds, the outcome will be more a matter of what you don't see happening than what you do.
June 25, 2010
The Congressional conference committee reached agreement early today on the final version of the banking reform bill that will go before the House and Senate for a vote next week. While that should be just a formality, keep in mind that the conference committee process has been contentious enough (with committee approval passing along party lines) that there is still a live long-shot of a chance that the bill won't pass both houses.
In the meantime, assuming the bill does pass into law, what do the changes mean to you as a banking consumer? MoneyRates.com will have more detailed analysis available immediately after the bill passes, but as a broad generalization, here's what the impact of the bill should be: safer, but more expensive, banking.
The specific consumer protections of the bill are all well and good, but the significant component is the so-called Volcker Rule, which would limit the ability of banks to speculate with federally guaranteed deposits.
In short, banks should go back to acting more like banks, and less like casinos.
The cost is that, with fewer ways for banks to make money and with more fees being levied on banks, there will be pressure on bank profit margins. This will show up in the form of lower rates for your savings accounts, money market accounts, and CDs, or fewer free services. For instance, free checking accounts might become less prevalent--though the more likely scenario is that account requirements for free checking will become tougher. With over 7,000 FDIC-insured banks, it is likely that some free checking accounts will still be out there.
The impact on bank rates will be impossible to measure precisely, which makes it a more politically palatable form of cost than fees. In other words, it is a hidden cost of this legislation, and once again, America's savers are footing the bill, just as they've paid for the low-interest-rate policies that were largely prompted by the banking crisis in the first place.
The bottom line, though, is that having the Volcker Rule provisions in the law may just be worth it. They are a return to the spirit of the Glass-Steagall legislation, which was passed during the Great Depression and worked pretty well for over 65 years. That legislation was repealed in 1999, and we all know what happened next....
June 23, 2010
No organization gets more attention for doing nothing than the Fed.
The fact that the Federal Reserve concludes a two-day meeting today has been widely reported -- as has the fact that the Fed is expected to leave its bank lending rate near zero.
Not only is the Fed expected to do nothing today, but speculation centers on whether it will renew its pledge to continue to do nothing with interest rates for the foreseeable future.
Against this slightly absurd backdrop, one has to ask a serious question: has the Fed painted itself into a corner with these near-zero interest rates?
The dilemma is that these low rates have done little to stimulate the economy, and yet raising them would be disruptive to the financial markets. So the Fed has pretty much used up all its bullets, yet employment has barely budged, and experts hold their breaths as they wait to see if the housing market can survive the expiration of the home-buyer tax credit.
Meanwhile, the Fed can only hope that inflation stays benign, because that would give it a real dilemma between maintaining the illusion of a stimulative fiscal policy or raising rates to head off inflation. With large emerging market economies heating up, a dose of commodity inflation could make this dilemma a reality.
Meanwhile, another factor continues to get little mention -- the fact that near-zero savings account rates, money market rates, and CD rates diminish the income of savers. Here's a thought -- since low interest rates aren't stimulating borrowing, perhaps putting more money in the pockets of savers via higher interest rates would stimulate spending.