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A fresh jolt for consumers

Banks cut interest rates on deposits as cash flows in, and some borrowing costs are expected to rise.

By MSN Money Partner Aug 9, 2011 3:07PM

This post comes from Suzanne Kapner, Robin Sidel and Dan Fitzpatrick at partner site The Wall Street Journal.


Cash-strapped Americans are bracing for a further squeeze following last week's downgrade of U.S. government debt, as interest rates on deposits continue to fall and some borrowing costs edge higher.


Consumers have already been struggling with high unemployment and elevated levels of personal debt incurred during a pre-recession spending binge. Now they are grappling with shrinking retirement accounts, as major stock indexes nose-dive and yields on U.S Treasurys touch new lows amid the market turmoil.


"People are going to feel less rich and that will make them hold back on spending, which would be a further blow to the economy," said Beth Ann Bovino, a senior U.S. economist at Standard & Poor's. On Friday, the firm lowered its rating of government debt one notch to AA-plus, the first time the U.S. has lost its top-ranked standing.


Flooded with cash

Consumers are already earning less on the money in their checking, savings and money market funds as well as on certificates of deposit, because banks, flooded with cash in the market upheaval, continue to reduce rates as they have trouble finding profitable ways of investing the cash and are faced with higher regulatory costs.


Some consumers said they were already changing their spending and investing habits as a result of the debt downgrade and the continued uncertainty over the economy. Post continues after video.

"My wife and I decided over the weekend that we've got to go on another high-alert spending freeze, because we don't know what the future holds," said Warren Hershkowitz, 39, who owns a real-estate consulting firm in Manhattan.


Ryan Zagata, a 37-year-old software sales executive who lives in Brooklyn, N.Y., said he was reconsidering the amount of money he invests in mutual funds. "My wife and I talked about moving more of our money to cash. We are not there yet, but we will definitely slow down the amount we are investing each month."


Banks across the U.S. cut rates Friday on four- and five-year certificates of deposits, pushing them to historic lows, according to Market Rates Insight. Bank of America Corp., the nation's largest bank as measured by assets, lowered rates on four-year CDs by as much as 0.45 of a percentage point in certain states. JPMorgan Chase & Co. cut its long-term rates by a quarter percentage point earlier in the week.


Rates for savings accounts fall

The average deposit rate is 0.79%, compared with a high of 4.53% last seen in September 2006, Market Rates Insight said. Deposit rates are expected to fall further as the flight to the safety of federally insured bank accounts continues.


Since December 2007, domestic deposits have increased by $1.1 trillion and now total about $8.1 trillion. The larger a bank's deposits, the larger the total amount of interest it has to pay out and the greater the payments it has to make to regulators in order to insure those funds.


Bank of New York Mellon Corp. became the first financial firm last week to charge corporate clients a fee for holding large amounts of cash. Analysts said they don't expect it to be the last.


"It's only a matter of time before banks lower rates even further or start charging to hold deposits," said Dan Geller, executive vice president of Market Rates Insight.


The higher deposit costs are especially painful to banks, because they are unable to offset them by making more loans. Both the volume of lending and the rates that banks charge borrowers have remained anemic since the recession, curtailing a major source of revenue.


Geller said the combination of higher deposit costs and lower loan revenue was unsustainable for banks and could lead to increased borrowing costs for consumers as financial firms try to boost revenue.


Auto loan rates rise

Auto loan rates, which had been falling since the beginning of the year, have started to edge up in recent weeks, according to The average five-year loan for a new car now carries a rate of 5.6%, up from 5.43% in June.


Credit card rates have largely remained unchanged since new rules took effect last year that restrict the fees and interest rates issuers can charge. The rules require issuers to give customers 45 days' notice of any rate increase and only apply the increase to future purchases.


Mortgage rates, which tend to trade in tandem with yields on 10-year government bonds, declined slightly on Monday as prices of U.S. Treasurys rallied, and remain near all-time lows.


But analysts said they expected financial firms to review their borrowing terms and potentially raise rates for the least creditworthy borrowers in coming months.


Mike Moebs, who provides consulting services to banks, said he expected consumer borrowing costs to increase by a quarter to a half percentage point over the next six months.


"If Uncle Sam is riskier, so is everyone else," Greg McBride, a senior analyst with Bankrate, said.


More on The Wall Street Journal and MSN Money:

Aug 9, 2011 3:42PM

With the Fed keeping interest rates low, the poor sucker who tries to save money in banks is getting screwed.  Hard to believe that having $100,000 in the bank will generate around $30 interest for one month and $360 a year.  Inflation eats the interest earned and then the government taxes the interest earned.


The Fed should be raising interest rates because the banks are borrowing from the Fed at zero interest and then buying US treasuries while not loaning anyone money.  This policy is counter productive.  The Japanese tried the low to zero interest rates and it did nothing for the economy for ten long hard years.

Aug 9, 2011 4:10PM

I'll admit that I'm as ignorant as they come when people start talking economics, investments, etc.  But I do understand one thing: I see no return on keeping my money in the bank.  I don't have a lot. In fact, the amount is so paltry -- around $11,000 -- it's almost laughable.  But it is more than I have ever been able to save.  It used to be that I could never keep more than a few hundred in savings, but with the economy the way it has been over the last two years or so, I have been more frugal -- spending less and saving more.  But you have to ask: What's the point?  Isn't it ironic that cutting my spending habits has allowed me to save more, while at the same time, saving more isn't really getting me anywhere?  I think last month my interest payment was around $1.89.  Yep, that's right.  A whole dollar and eighty-nine cents.  How is it that the bank can take my money, invest it, make millions, but return to me practically nothing for the use of my money?  And if they aren't investing it, then why do they want people to save?  It's all too confusing to me.  Can someone explain it more simply in layperson terms?

Aug 9, 2011 3:35PM
The FED is to blame for the low rates on savings and CDs.  Why would banks borrow money from investors when they can get it from the FED for nearly nothing?  Of course, the FED knows this and does it for a couple of reasons. First, it gives their bank buddies low cost money to loan, but the big banks do not loan the money, they reinvest it.  Second, the FED does not want consumers saving.  The FED wants consumers spending.  The FED announced today that the low rates will be around around till 2013.  Central Banking determines monetary policy and benifits the big banks.  Encourage your representatives to get rid of the FED.
What SHOULD happen, is that EVERY American should immediately make a run on their bank - withdraw ALL funds. The banks will be, first "cash poor", which will raise their asset to debt ratio and create "on the books" insolvency. Second, they have less cash to pay their expenses.
You're already getting less than 1%, AND that 1% is taxable.
IMMEDIATELY put those funds in either credit unions, or offshore banks.
It IS time to fight back.

Aug 9, 2011 3:37PM

Get ready folks. As the big handout nations in Europe collapse under the weight of their nanny state, many of our largest banks will also collapse.

All it takes is a Spain or Italy to start the chain reaction. If Italy goes, so goes Spain, Ireland, Portugal, and of course Greece.

The "P.I.I.G.S." collapse, the EU collapses.

And they will take many international banks and insurers with them.

You won't have to be first in line to get your money out, the US will print enough to cover deposits. But of course that will lead to unimaginable inflation. With no interest payments, the mattress will be a competitive depository.

At least we will all be together - in our misery.

Aug 9, 2011 3:58PM
the more they cut rates the less revenue they get...the liberals want more tax hikes...i say tax what?...savers are basically earning nothing...stock investors are probably losing...government has basically outsourced a great percentage of income producing jobs...they might confiscate the dwindling property values remaining...maybe they'll try to confiscate gold as in the past...this war mongering entitlement expanding government will consume everything eventually if it isn't  brought down...
Aug 9, 2011 5:29PM
When the banks lowered interest rates to borrowers, they lowered interest paid to savers and started tacking on fees for everything that used to be free of charge. The lower the borrowing rate the lower the paying rate. I saw this years ago and so did anyone with sufficient math skills. Whether it be business or government the more money they waste the more money the consumer will have to pay. Till the consumer says enough!
Aug 9, 2011 5:28PM
I look at it this way a majority of the big banks are making money hand over fist.  Think about it they barely give 1% YTD (year to date) interest to savings accounts and your checking is less then 1%, you pay fees to get checks to have money in accounts that is less then $1000 in some cases less then $2500, for those of you that have those accounts that aren't attached to a checking and or credit card account which costs another fee.  Your only allowed to withdraw money from your savings 3 times for free after that you have to pay a withdraw fee.  Credit cards have increasingly higher and higher interest rates that are compounded monthly not yearly like your savings or checking account.   The lowest interest rate I've seen on credit cards these days are for 7.99% and thats with an annual fee of $100 as well as a purchase fee of $1 and a minimum purchase of $100.  If you get a more flexable card best I've seen is 13.99% most cards are going to be around 17.99% and worst cards I've seen have been 29.99% with the $100 annual fee as well as a $2.50 purchase fee.  Most of your gas station cards are the higher interest rate cards and if you look at where they credit is coming from you'll find that it comes from the big banks.  So why if they are making that kinda cash off credit cards, and other fees not to mention mortgages, micro loans, and other loans.  Why is it they are forcing they're customers to pay for it?

Credit unions are better, being that they do offer lower interest rates on loans and mortgages, as well as offering higher interest rates on checking accounts, and savings accounts.  Offshore accounts are a good idea if you have in excess of $1,000,000 to save.  Otherwise credit unions are the way to go.  Also the bigger the credit union the better the benefits.

All I gotta say is what goes around comes around.   And so far the banks are screw'n people guess what banks are about to get screwed by the people.  Might not help the economy but heh the worker has been **** on enough these days time to fight back!

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