On December 16, 2015, the Federal Reserve raised the targeted Fed Funds rate by 0.25 percent, and within minutes banks took action. Wells Fargo was the first to announce their plan to increase their prime-lending rate. U.S. Bancorp, JPMorgan, Chase, M&T, and PNC quickly followed suit. Despite the immediate response to increased lending rates, these same banks promptly stated their deposit rates would remain unchanged.
In 2004, when the Federal Reserve last began to raise the target rate, the initial increase of 0.25 percent was followed by 16 additional rate increases over a 2-year span. The impact on deposit rates was slow. Similarly, many experts believe it will take several more interest rate hikes before savers see any meaningful impact on their interest rates.
Interest rates are affected by more than just the target rate. Rates on bank deposits, CDs, money markets, etc., are largely dependent on overall lending demand and the banks’ need to attract additional cash. Currently, banks don’t need additional cash as they have an unprecedented amount available to lend due to years of stimulus by the central bank. That means the delay in increased deposit rates will probably be longer than it was in 2004.
Federal Reserve Chair Janet Yellen has indicated that interest rates will only rise if further improvement in the overall economy warrants an increase. With the Federal Reserve’s current commitment to their accommodative monetary policy, banks will continue to have more than enough liquidity and will not need to raise deposit rates as quickly as other rates may rise.
Since the end of the Great Recession (2008- 2009), investors have sought safety with their investments. Bank deposits have grown an average of 6% annually since 2009. According to the Federal Deposit Insurance Corp., US bank deposits now total approximately $10.6 trillion. While bank deposits have grown, interest rates have remained at all-time lows.
The average interest rate on many money market accounts is 0.1 percent. Retirement product rates such as the 3-year GIC (Guaranteed Investment Certificate) are still approximately 1.50 percent, highlighting the lack of correlation between a typical retirement product and the recent move in the Fed Funds target rate.
For six decades, the MBA Income Fund has weathered many different interest rate environments. The flexibility to adjust rates based on careful analysis has allowed the MBA Income Fund to continue to thrive. In 2015, the 403(b) plan added over 1,400 new enrollments and the MBA Income Fund added $40 million in balance sheet growth. It continues to provide stability at a premium rate for our participants.
In addition to the MBA Income Fund, we are pleased to offer a variety of investment options for participants who are willing to take additional risk for potentially higher returns. One of these options is the Steward Funds. These faith-based funds align with your values by providing a screened indexed approach, avoiding investments in companies that derive a significant portion of their revenue from abortion, pornography, alcohol, tobacco, and gambling. The award-winning Steward Global Equity Income Fund Institutional Class is included in this family of funds and was the recipient of the 2015 Thomson Reuters Lipper Fund Award. The award recognizes funds that deliver consistently strong risk-adjusted performance relative to its peers.
With interest rates expected to remain at historical lows, the MBA Income Fund rate remains at a significant premium to similar retirement products in the market.