What Does a Recession Mean for Bank Savings Interest Rates?
Recessions have different causes and different effects. Savings rates are partly influenced by a recession, but also by the reactions to the recession itself, both by individuals, banks, and the banking system.
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Identification
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An economic recession refers to a contraction in the economy (often measured by GDP). When the economy slows, both individuals and businesses are tempted to save more, having a downward effect on savings account interest rates.
Effects
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In a recession, consumer spending tends to decline as unemployment rises. Because the velocity of money decreases, inflation retreats, cash has more value, and there is a greater incentive to save.
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Significance
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The greatest single effect of a recession on savings rates is the reduction of benchmark lending rates by the Federal Reserve and key commercial banks which are intended to spur the economy by lowering the return on savings, and thus incentivizing investment.
Considerations
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The Fed funds rate tends to track the yield on very short-dated Treasuries bills. An economic recession tends to drive yields lower as investors seek to park their capital in risk free assets.
Features
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Small banks often use higher savings interest rates as an incentive to gain new depositors; deposits serve as the capital base from which they can make loans and fund investments, so the rate of return on a savings account will always be lower than general rate of return on the bank's loans and investment portfolio.
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