FDIC tells banks to prepare for interest rate hike in 2012

By Michele Lerner

The Financial Times reported on Feb. 24, 2011, that FDIC Chairman Sheila Blair has warned the largest U.S. banks to prepare for increasing interest rates. While the slow economic recovery and limited inflation have encouraged the Federal Reserve to keep the federal funds rate close to zero since December 2008, some economists anticipate an increase in interest rates in 2012.

According to the Financial Times, since 2008, bank deposits have climbed 10 percent while loans have declined by 13 percent. Some banks have begun holding more securities to improve liquidity. The securities held by banks as a percentage of their total assets peaked at 28 percent in November 2010.

Stress tests on banks and interest rates

The Financial Times said that some government officials believe that the possibility of an increase in interest rates should be taken into consideration as banks are being given stress tests to determine their strength. But the Federal Reserve has yet to make a firm commitment to increasing interest rates in 2011.

Monetary policy and money rates

On March 1, 2011, Federal Reserve Chairman Ben Bernanke presented the semiannual Monetary Report to the Congress to the Senate Committee on Banking, Housing and Urban Affairs. While the good news is that Bernanke sees "increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold", he notes that the job market has improved more slowly than expected and that the housing market is still weak.

Bernanke says that the pace of the recovery has slowed since last spring and that inflation has, for the most part, declined. While an easing of monetary policy would typically take place to encourage growth under these circumstances, the federal funds rate has been near zero for more than two years already. Bernanke says that "economic conditions are likely to warrant an exceptionally low target rate for an extended period."

Bank deposit rates

While there is a glimmer of a possible interest rate increase in 2012, consumers in the meantime face the challenge of searching for better rates on their savings. Few economists expect any movement on interest rates earlier than next year.

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