Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 7, 1994 TAG: 9402040289
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: By Mag Poff staff writer
DATELINE: LENGTH: Short
From the financial reports we receive, it appears that bank profits have increased substantially, but they are still paying a very low rate of interest to their depositors.
A: Banks are free to pay any interest rate they choose. Interest payments are no longer set by regulation.
Two separate forces play a role in the process of determining rates.
The Federal Reserve Bank controls rates within broad parameters. It keeps rates low when, as it was recently, it is trying to encourage an economic recovery. But now, the Federal Reserve Board has said rates should rise soon to control inflation, which should be reflected in your bank CD earnings, perhaps by spring.
The second factor is market competition. In general, banks have all the deposits they need, so they have no reason to compete with each other to attract new accounts or more cash. If you read banks' advertising, you will note they are instead competing for loans because people are still reluctant to borrow.
When the loan business improves so that banks need more deposits to support it, you will see banks again competing for deposits by offering the incentive of higher interest.
by CNB