Looking for a sign of the times? Look no further than your local bank marquee.
That’s where you’ll see banks advertising rates of more than 5% annual percentage yield on their certificates of deposit, or CDs.
Less than two years ago, the same CDs would have returned annual yields of less than 0.25%. But as the Federal Reserve Bank has hiked interest rates to tame inflation, banks have brought back more robust returns on time, or term, deposits, including CDs, to attract more customers.
The Federal Reserve has raised its federal funds rate, which is the overnight rate banks pay for borrowing, 11 times since March 2022, when it was at 0.25%; it now stands at 5.5%.
That has made the CD a more prominent tool for banks. Amy Morbeck of Arvest Bank of Fayetteville said having higher-interest CDs brings money into the bank more cheaply than borrowing from the Fed. And that can result in banks offering lower loan rates to potential borrowers.
“If we have to borrow money from the Fed to loan it out into the community, it is more expensive for the bank,” said Morbeck, an executive vice president at an Arvest Bank branch in Bentonville. “If we’re paying our customers a higher interest rate [for] leaving that money here at the bank and using those deposit dollars to lend back out without borrowing from the Fed, it keeps those loan rates lower.”
Morbeck said Arvest Bank offers a variety of CD specials, including those that allow early withdrawals without penalty. The bank, she said, has seen a 42% increase in CD purchases since the fourth quarter of 2022.
Deposit Lull
Attracting more deposits has become a priority for banks nationwide.
The Federal Deposit Insurance Corp. reported earlier this month that total deposits had declined for the fifth consecutive quarter, creating what Morbeck calls “a battle over deposits in the marketplace.” The latest quarterly decline was $98.6 billion, or 0.5%.
“In the first quarter of this year, there was actually a record decline,” she said. “Those deposits allow for lending, for us to help in the community. There are a lot of needs there.”
Joshua Jensen, the chief deposit officer at Simmons Bank of Pine Bluff, said the current environment for bank deposits and CD rates correlates to the Federal Reserve’s actions in raising the benchmark rate. The higher rate pulls money out of circulation to fight inflation, driving down the money supply for deposits, so banks make CDs more attractive to bring in more deposits.
“As the Federal Reserve Bank moves their index rate and what the U.S. Treasury does with their corresponding yield, that helps direct and influence what the banks price their rates at,” Jensen said. “The Fed increases rates to pull money out of supply, and [that creates] more demand from banks for deposits.
“They will compete against each other by offering higher rates to bring in those deposits. That is the exact method of what the Fed is doing to help control inflation.”
Simmons Bank, in its earnings report filed with the U.S. Securities & Exchange Commission in July, said its total deposits were $22.49 billion for the second quarter of 2023. That was up slightly from the first quarter but was a decrease from $22.55 billion in the fourth quarter of 2022.
Time deposits, such as CDs, rose during the same period. Simmons Bank reported $3.2 billion in the second quarter of 2022 but that rose to $6.4 billion by the end of June 2023.
“Banks are looking for stability and their deposit customers,” Jensen said. “They are rewarding their deposit customers with higher rates on CDs.”
Customer Interest
The benefit for the bank customer is pretty straightforward: a higher return on a deposit.
Investing in CDs is a conservative strategy. Put in several thousand dollars (or more) and then at the end of the term of the CD, receive that money back plus the interest.
The FDIC insures CDs against loss for up to $250,000, making them appealing to investors wary of the stock market.
“This is a normal course of the cycle,” said Brant Ward, president of Signature Bank of Arkansas in Fayetteville. “When the stock market is running hot, that will change how people think about CDs. When they are afraid of the stock market, they will think differently. I don’t see this as anything other than just the normal course of a cycle.”
Although most financial advisers would probably not recommend CDs as a long-term investment instrument, they make a good place to park some cash.
“For the last two years the stock market has been more volatile,” Morbeck said. “A lot of people, their retirement accounts are lower than they were just a few years ago. They are wanting more stable ways to save their money and earn higher interest.
“The stability is a big factor, the higher interest rate is another big factor. We are seeing a lot of appetite there.”
Ward and Jensen said CDs are a good place for people to put their money while deciding what they may want to do with it for a longer term. They are also good for consumers who expect to need the money in a year’s time.
“The other thing is real estate prices in northwest Arkansas continue to go up so some people will sell their property and then wait to see if they want to reinvest in property,” Ward said. “It is more about the personal portfolio, and the timing of getting their money back. Frankly, if rates were to go up from here, people want to take advantage of that, too.”
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