Higher Deposit Rates Coming to Bank Accounts?
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What is the episode about and why should I watch deposit rates now?
Your Money Briefing Money and Market Stories from The Wall Street Journal. I'm J.R. Whalen in New York. Keep an eye on the deposit interest rates at your bank. They might be ready to move higher. We'll have details on that in a moment, but first, here are some money items you need to know. The Wall Street Journal's real estate team says America's new housing crisis is likely to center on the fact there is simply not enough new homes, with fewer new homes being built in America than at almost any time before. Here's the problem. While demand for housing is up, Land and construction costs have roughly doubled since the end of the last housing boom a decade ago. The Wall Street Journal's Heard on the Street team reports a victory for the Department of Justice over AT&T and their antitrust battle could broadly reset the rules for mergers.
The government has historically challenged horizontal mergers, which combine similar businesses in an industry, rather than vertical mergers, like the proposed AT&T-Time Warner combination, where businesses within the supply chain merge. If the DOJ wins, its most immediate move could be to threaten the current wave of deals in the drug industry, where insurers are buying up middlemen. And Facebook's share price fall on Monday shaved roughly $35 billion from its market cap. That was enough to remove it from the ranks of the five biggest companies in the S&P 500.
What recent money and market headlines set the stage for this discussion?
The social media giant's stock was down more than 7% in intraday trading after disclosing that a firm with ties to the 2016 Trump campaign improperly kept data for years despite saying it had destroyed those records. Facebook's market cap decline pulled it lower than the market cap of Berkshire Hathaway, Google Parent Alphabet, Amazon, and Microsoft. You're listening to your Money Briefing from The Wall Street Journal. Welcome back, everybody. The Federal Reserve has raised short-term interest rates five times since late 2015. And while the stock market has responded to those moves, banks, who traditionally consider raising deposit interest rates, have not. But that's expected to change soon. Wall Street Journal reporter Christina Rexroad is here to explain.
So, Christina, banks on average have been raising deposit interest rates, but at very small intervals. But we're expecting more significant increases moving forward?
Well, we think that that could happen. The way that interest rates on your bank deposits work is it's a little bit like when you read a story about how the price of oil is going up and then the gas station, you notice, raises prices of gas right away. And then when you see when you might read a story that the price of oil is going down and you notice that your gas station isn't as quick to lower prices. So the Fed sets a short term, a target short term rate. And that is supposed to encourage the banks to raise rates on what they're paying on your bank deposits. But they certainly don't have to. And obviously they're going to try to wait as long as they can since it costs them money if they're going to pay you more for your bank deposit.
So there's really no reference point, there's no owner's manual for the banks to say this is when you should raise your rates?
No, there's no owner's manual. In past cycles, the way that this has usually happened is when one bank jumps ahead with a notable increase in rates, it can sort of force the other banks to follow.
Okay. This is a bit of a balancing act for the banks, it seems, because they need deposits to fund things like loans, but they also have to make it worthwhile for people to actually deposit their money.
Yeah, exactly. But the interesting thing about this cycle, which is different from the last rate-raising cycle, And there are many things different because the last rate-raising cycle was 2004 to 2006. And I think a lot of things have changed since then, both in our lives and in the Fed. But this time around, the banks have a lot of deposits. People for the past decade have been putting their money in bank deposits and being cautious with what they invested in.
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