Goldman Beats Fed By Cutting Rates On Its Online Saving Account First

For the past two years Goldman's retail bank group, also known as Marcus, would gleefully declare periodic increases on the interest rate applicable to the Goldman Online Savings Account, usually matching raises in the Fed Funds rate. That all changed yesterday afternoon when Marcus sent out the following email to clients:

As Goldman explained, starting this week the bank was cutting the rate on its Marcus high-yield savings account to 2.15% from 2.25%:

Starting tomorrow, the rate on our high-yield Online Savings Account will be 2.15% Annual Percentage Yield (APY). As always, we’re committed to offering a highly competitive rate (more than 4X the national average) and helping you grow your savings.

Goldman wasn't alone as just prior, Ally, aka GMAC, did the same with its online savings account, whose APR was cut from 2.2% to 2.1%: “Interest rates are on the downswing and projected to fall further,” Ally said in a note to customers explaining the move. Goldman didn’t offer customers an explanation but suggested they explore its high-yield certificates of deposits.

What does this mean?

Simple: the banks - at least those that offer sensible interest rates on deposit accounts - have decided not to wait for the Fed any longer and are now certain that the Fed will cut rates either in July or later this year.

One thing is certain: savers' hopes that interest rates would renormalize are now over, and while still roughly half of where savings rates hit just over a decade ago before the financial crisis, the next stop will be not 3% but rather 0%, if not negative.

As a reminder, central bank began raising rates from near zero starting in 2015 at a pace that allowed banks to charge borrowers more while keeping deposit costs in check. That gave Goldman, Ally and other online-only banks an opening to lure savers with above-market yields. That opening has now closed.

Meanwhile, as a result of the Fed’s decision to pause rate increases earlier this year, pressure on banks to pay depositors more has been now eliminated, as one bank after another begin the race back to zero.

As for the banks, the cuts are quite meaningful. Citing Vincent Caintic, managing director for Stephens, the WSJ notes that for every 10 basis points—0.1 percentage point—that Ally lowers its savings rate, the company boosts its earnings by 3%.

Oh well, it was fun while it lasted. What is more bizarre is that few banks even went so far as to raise rates during the Fed's now concluded hiking phase. Ally and Goldman still pay savers well above the rest of the industry. The average interest rate on a savings account has stayed steady at 0.1% in 2019, according to Bankrate.

What this means is that with well over $1 trillion in excess deposits still sloshing around in the system, few banks are worried about depositor flight. On the other hand, business models that hopes to leverage deposits - such as Marcus - may have to take a long hard look at how they will fund themselves in the future if their primary draw - higher rates - is now gone.