closeup image of Federal Reserve Governor Lael Brainard

Headwinds Turning to Tailwinds

In a speech in New York earlier this month, Federal Reserve Governor, Lael Brainard, made a good case that many of the roadblocks we encountered over the past few years, may have turned the corner and instead of creating headwinds are generating tailwinds.

She believes that, in spite of “choppiness” and tightening in the beginning of 2018, conditions are ripe for growth. As one example she remarked that after two years of weak growth in 2015 and 2016, business spending on fixed investments grew by more than 6% in 2017.

In her own words, ”Although last year we faced a disconnect between the continued strengthening in the labor market and the step-down in inflation, mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations in my view. With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate.”

Not only is that music to our ears, we have numbers that back it up, too.

Looking at these two charts, two things jump out: 1) deposits grew at an incredibly fast rate in the years following the housing bubble. At this same time, American consumers were paying down debt and trying to live more within their means. Flush with deposits and no one to loan them to, there was no need for banks to attract more deposits by raising deposit interest rates.

Loan rates, on the other hand,  began to rise right away. After a couple of years, consumers started to feel better about the economy and their job prospects and began borrowing again, but not enough to make the most out of all those deposits. From year-end 2010 to year-end 2017, deposits at U.S. banks grow more than 42% while loans grew less than 32%.

Banks still may not need to raise deposit rates from a loan demand perspective, but many are being pressured to do so anyway. That’s lucky for us. In the past year, the average CD rate has gone up nearly three quarters of a percent. And it will only continue upwards.

Bank Deposit Graphs