Aggressive Fed Throws Wrench into FIs' Deposit-Cost Plans

Source: American Banker

Financial institutions started the year thinking they could hold off on raising the deposit rates they pay to customers, but a more aggressive Federal Reserve is starting to change that calculus.

The thesis that deposit costs will stay subdued for a while mostly remains on track — since, with loan-to-deposit ratios near historic lows, FIs have little incentive to pay more to retain depositors. But the Fed is raising interest rates rapidly in response to soaring inflation, and those moves have reset expectations about when banks will start feeling pressure on deposit costs.

The Fed raised short-term rates by half a percentage point last week, its largest hike since 2000, and signaled it is likely to do so again at its next two meetings. The central bank will also begin slimming down its $9 trillion bond portfolio in June, and will be pulling about $95 billion out of the financial system each month when the reductions reach their full pace.