Who really paid the price for the financial crisis?
The most innocent victims of Federal Reserve policy may have been people with money in deposit accounts.
While FDIC insurance protected most depositors from direct losses, the low-interest-rate environment engineered by the Fed allowed inflation to eat away over a trillion dollars of purchasing power from U.S. deposit accounts over the past nine years.
Low interest rates may have seemed like a necessary sacrifice during the financial crisis, but it may rankle consumers to learn that the last 12 months have been the worst yet for losses to inflation due to low interest rates.
Consumers with money in the bank would be wise to protect their assets from the ravages of inflation rather than to wait for the Fed (or banks in general) to do the job.
$1.3 trillion loss of purchasing power
Nobody expects to make a fortune in a deposit account, but it is reasonable to hope your savings will earn enough interest to keep pace with inflation. Unfortunately, when the Fed drove interest rates to extraordinarily low levels in reaction to the financial crisis, deposits began to lose purchasing power to inflation.
MoneyRates.com calculates the total value lost to inflation by U.S. bank depositors since the end of the Great Recession at $1.3 trillion as of March 31, 2018.
But even with the financial crisis fading in the rear view mirror, the loss of purchasing power over the past 12 months topped $258 billion, the highest of the nine years for which MoneyRates.com has calculated this figure.
Fed rate increases don't keep pace with inflation
More recently, the Fed has been making small increases to the federal funds rate. So why are savers still losing ground?
A big reason is that those fed interest rate hikes have not kept pace with rising inflation.
When the Fed started raising rates back in December of 2015, the federal funds rate averaged 0.24 percent while year-over-year inflation was 0.70 percent. This meant that the fed funds rates trailed inflation by 0.46 percent.
Fast-forward to March of this year, and the current fed funds rate averaged 1.51 percent. Unfortunately, year-over-year inflation had risen to 2.4 percent, so the gap between inflation and the fed funds rate had grown to 0.89 percent.
Banks -- and consumers -- are slow to adjust
As if to add insult to injury, not only have fed rate increases failed to keep up with inflation, but banks have been even slower to raise deposit rates.
Since the Fed began raising its rates in December of 2015, the average money market rate reported by the FDIC has climbed by a measly 0.03 percent.
Ironically, depositors have rewarded banks for their lackluster interest rates by trusting more and more deposits with them. This has only compounded the problem: From March of 2009 to March of 2017, the amount of money on deposit in U.S. banks rose from $7.5 trillion to $11.8 trillion, allowing substandard rates to do even more damage.
How to earn better rates
If rising interest rates are a slow-moving train, then consumers are on the back end of that train. Fed rate increases are not keeping up with inflation, and bank rates are lagging behind fed funds rates. The result? Consumers with money market accounts and other deposits are losing purchasing power to inflation.
In other words, your bank accounts may be earning interest, but chances are that you're losing real wealth rather than accumulating it because inflation has consistently outpaced money market rates since the end of the Great Recession.
Here are three things you can do to fight back and protect your hard-earned savings:
- Shop around
Bank rates do not move in unison. In fact, the most recent MoneyRates.com America's Best Rates survey found that a group of banks have been widening the gap between the best savings account rates and average rates. That can give a bigger advantage to consumers who take the time to shop for the best rates.
- Consider banking online
If you want to know where to find the best rates, online accounts are a good place to start. Online deposit accounts have generally offered better rates than traditional, branch-based accounts for some time now -- and the advantage is widening here too.
- Try a CD ladder
Unless you need ready access to your deposits, you might consider improving your yield by putting some of your savings into CDs. A CD ladder is a technique whereby you can own a series of CDs with different maturity dates -- and that lets you earn higher yields while still ensuring that your money will become available at regular intervals.
Perhaps it was inevitable that savers would foot the bill for the financial crisis, simply because they had the means to do so. However, nine years into an economic recovery, it may be irritating to realize that you are still paying for the mistakes of others. At least there are steps you can take to improve your interest rates and reduce the toll inflation is taking on your savings.
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