Making the Most of a Low Interest Rate Environment

Toy construction men doing work on the % key of a calculator – the image is meant to represent businesses working for a better interest rate during a low rate environment

As we approach 2021, interest rates remain at near zero levels. And, unfortunately for businesses with large cash reserves, The Fed intends to keep them low until there is a sizable rebound in both employment and inflation. This is projected to take years.

To complicate matters further, research from S&P Global indicates that rates at your local bank could fall even further. So, what should we expect from The Fed, and what can businesses do to be sure their excess cash is safe and earning a return in this ultra-low rate environment?

Fed Stands Strong Against Future Interest Rate Hikes

Although there has been a great deal of positive news on the vaccine front, with some front-line workers already receiving their first dose of the a vaccine, The Fed has not changed their expectations for the course of interest rates over the next three years. The Fed Funds Rate is expected to remain near zero through 2023, despite Fed Officials having already raised their projections for inflation, employment, and GDP growth over that same period. This essentially amounts to further easing of monetary policy.

Inflation is expected to rebound to the 2% target sometime in 2023, but a recent Fed policy shift allows for inflation to “moderately exceed” 2 percent for some time. This means that rate hikes will likely come after that rebound. Only 5 of the 17 central bankers expect inflation to be over their target by 2023, and the longer-run average expectation remains at 2.5%. This shows that while employment is expected to rebound to near 4% levels by 2022, The Fed has shifted its focus to inflation as the main indicator that will influence rates. This stance is further evidenced by the rate drops that occurred late in 2019, even while unemployment was historically low.

Currently, CPI is far from The Fed’s target at 1.2% annually. In fact, CPI remained steady from last month while both PCE and core PCE inflation have recently regressed to 1.2% and 1.4% respectively. This data indicate that inflation is not an immediate threat to The Fed.

Banks are Awash with Funds, Rates can still Fall Further

Deposits are continuing to flood U.S. banks which is pushing the cost of funds down even further as the recovery continues. The overall cost of funds has dropped to 28 basis points, and the cost of savings deposits is 14 basis points. Transaction and savings deposit growth have accounted for most of the gain, while time deposits are shrinking. This increased liquidity could drive interest rates down even further.

The Fed is also doing its best to keep financial markets as liquid as possible. Last meeting, Fed policy makers reemphasized the current Treasury and MBS buying program that has been ongoing since the pandemic began. In addition, Congress recently finalized a stimulus package that creates a second round of the Paycheck Protection Program and provides other small business relief. Retail deposits, which have been exceptionally resilient throughout the pandemic, should increase substantially as Congress provides small businesses and individuals with extra funding.

How to position your business cash in this environment?

Although rates are creeping closer to the zero-bound, there are still some ways to generate tangible returns on your excess cash. Here at ADM, we specialize in searching for and providing the most competitive rates on your excess business cash, all while maintaining full deposit insurance for every dollar.

With an American Money Market Account™ [AMMA] by ADM, there is no need to spend valuable resources chasing yields at multiple banks. Our proprietary fintech makes it easy for your business to secure unlimited FDIC / NCUA insurance, while finding the most competitive rates for your reserve cash. It all starts with a short application, and then you make your first deposit. The best part is you keep your current bank.

Earn More, Risk Less with an AMMA™ Account by ADM

When you open an account with ADM, our team of cash consultants will develop a strategy to optimize the return on your cash, maintain the liquidity that you require, and ensure your cash is 100% safe. Whether you need next-day liquidity, or if you are more concerned with planned cash outflows, we can develop a strategy that is right for your business.

At ADM, we take the work of cash management off your plate. If your business maintains a large reserve of cash, or if you are looking to reduce the work required to manage your cash, don’t hesitate to contact us. Our team is our “secret sauce”, and we look forward to the opportunity to provide your business with access to extended safety and nationally competitive returns.

Don’t miss our interest rate and Federal Reserve updates.

To ensure you stay current on major economic and interest rate developments, follow ADM on Twitter, Facebook and LinkedIn. We provide periodic breakdowns of FOMC meetings, including expectations and reactions, so you can stay informed. In addition, if you want to be sure your cash is 100% protected in these uncertain times, give us a call. Marketplace Banking™ by ADM ensures your company gets the MOST safety and the MOST return for your business deposits.


*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.

Tags: , , , , ,