Chart of the Day: Short Term deposits vs Federal Funds

Who sets the interest rate for your savings account?   Of course its your bank, but let's take a closer look. 

If you look at the short term deposit rates as measured by the Certificate of Deposits Index (CODI) against the Federal Funds rate, we see actually how much control the Fed has over that rate that you and I receive on our savings and checking deposits. The CODI takes an average of three month term deposits and tends to very closely mirror average rates for demand deposits and the interest rate on short term savings.

Of course, we can’t complain directly to the Fed, we can only call up our bank. The bank will say it’s the market rate, which of course is true, but that begs the question on how we have allowed a committee of balding PhDs to become the de facto short term rate setter? What if we had banks themselves set the short term overnight deposit rate? The real question that you have to ask yourself, is what should our short term interest rates be without the intervention of the Federal Reserve.


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