The Fed continues to signal that they will increase the Fed Funds rate at their June meeting which will be held on June 12th-13th. While they continue to ponder how many more rates hikes will be required to keep inflation from rising too quickly, banks should be focusing on the increasing pressure this next hike will put on deposit rates. With top prime money fund rates just shy of 2.00%, depositors cannot be expected to ignore any further spread widening relative to bank deposit rates. Banks should not bet on the low deposit betas that have characterized the last couple of years; these low betas are not robust to further rate increases, especially at banks that have continued to add aggressively to their loan portfolios.
It’s Time To Be Thinking About Interest Rate Risk
Fed Statement Comments and Interpretation
The Fed didn’t raise rates on May the 2nd, but they did keep the markets prepared for a hike at the next meeting in June. In addition, they noted that inflation had ticked up, albeit slightly. Wage pressures are beginning to come through the data and business investment has strengthened.
No real surprises, but it will be interesting to see where inflation goes from here and how much restraint they exercise from this point forward. With inflation benign for so long, it seems like they could easily be slow to respond. No doubt, we can expect rate volatility all along the curve as the markets react to every new piece of data.