PLW - Bank Account Exits Help Cool U.S. Inflation Engine
2023-04-11 11:30:00 ET
Summary
- Deposits at commercial banks fell by nearly $500 billion in the first 12 weeks of 2023.
- Like all investments that offer a higher yield, liquidity becomes an issue, even if it's marginal.
- Technology has made money more frictionless for consumers.
By Breakingviews
If Federal Reserve Chair Jerome Powell is hoping that the search for yield will help slow down inflation in the United States, the slightest of money migrations could actually be an unexpected ally. As more people park their savings in money market funds, they will have a harder time spending it. That could, in turn, help ease the pressure on prices.
Deposits at commercial banks fell by nearly $500 billion in the first 12 weeks of 2023, according to Federal Reserve data. Some firms, like Capital One (COF) and Discover Financial Services (DFS), are trying to attract depositors with bonuses for new accounts, but many have already moved their cash. Holdings in retail money market funds, meanwhile, have climbed by $184 billion over the same period, the Investment Company Institute said last week.
That's small compared to the $17 trillion in deposits housed in U.S. banks, but it's not insignificant. People are searching for better returns , and Fidelity's Government Money Market Fund, the largest such vehicle with $255 billion in managed assets, boasts an average one-year return of 2.3%. The average checking account, meanwhile, yields interest of 0.1%, according to the Federal Deposit Insurance Corp.
Like all investments that offer a higher yield, liquidity becomes an issue, even if it's marginal. Spending from a checking account is as easy as swiping a debit card. Tapping a money market fund requires a one- or two-day wait depending on what time a withdrawal is made. Fees are small but present. Brokerages can halt transfers for up to seven business days if an immediate withdrawal is deemed harmful, or there isn't a ready counterparty.
There's a direct correlation between access to personal funds and inflation. A 2016 study by Moody's Analytics found that the growth of electronic payments fueled significant increases in consumer spending and overall economic output. Separate research from the Central Bank of the Republic of Turkey said in 2021 that electronic transactions contributed to the country's inflation.
Technology has made money more frictionless for consumers, courtesy of electronic transfers through products like bank-owned network Zelle, which facilitated 2.3 billion payments last year. It makes sense that those trends have contributed to a rise in prices. And the opposite could be true, too. Even a moderate amount of friction could keep Americans from spending money as quickly.
Context News
Flows out of U.S. commercial banks have accelerated in the wake of Silicon Valley Bank's failure on March 10. Cash has also moved into retail money market mutual funds at a faster pace, with depositors likely attracted to their higher returns and perceived stability. Prices for U.S. goods and services rose 5% year-over-year in February, according to Personal Consumption Expenditures data published by the Bureau of Economic Analysis on March 31. That was down from a 5.4% pace recorded in January.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Bank Account Exits Help Cool U.S. Inflation Engine