Banks have been pumping up the rates they pay on certificates of deposit , or CDs, in recent weeks as they compete to gather customers’ cash. That dynamic has accelerated along with market expectations that the Federal Reserve will have to raise its benchmark interest rate higher to subdue inflation, Morgan Stanley analysts led by Betsy Graseck said Tuesday in a research note. “Late in the Fed rate hike cycle, banks tend to increase their highest CD rate offerings above the Fed funds rate as competition for deposits intensifies,” the analysts wrote. “Using history as a guide, this could put banks’ highest CD rate offerings near 5.5% late in 2023.” Higher rates have made holding cash a possible alternative to bonds and stocks for the first time in more than a decade. While better payouts reward savers, they also increase pressure on the industry’s profits because they squeeze the interest income that banks generate. The industry’s top average CD rate has already climbed by about 3.5% since the Fed started raising rates last year and currently sits below 4%, Graseck wrote. “We saw a re-acceleration of CD rate increases over the past two weeks, likely reflecting the higher probability that bank management teams are now assigning to a higher-for-longer rate environment,” the analyst wrote. — CNBC’s Michael Bloom contributed to this report.
