By Ryan Labriola, Senior Manager

On January 29, 2025, the Federal Reserve held steady the federal funds interest rate (the “federal funds rate”), which is the rate at which the Federal Reserve lends money overnight to financial institutions.  In its statement following its monthly meeting, the Federal Reserve wrote, “inflation remains somewhat elevated… [and the] economic outlook is uncertain.”[1] Based on these comments, market analysts believe the Federal Reserve will take a slower approach to cutting the federal funds interest rate, with potential rate cuts not expected until at least the second quarter of 2025.[2] [3]

Any future federal funds rate cut will depend on the preceding month’s economic data indicators, including inflation and labor market trends. A key complicating factor that concerns economists is President Donald Trump’s proposed tariffs, which some say could increase inflationary pressures. The President of the Boston Federal Reserve, Susan Collins, stated in response to President Trump’s announced tariffs on Mexico, Canada, and China, “[t]he kind of broad-based tariffs that were announced over the weekend, one would expect to have an impact on prices…[and one] actually would not only see increases in prices of final goods, but also a number of intermediate goods.”[4]

Depository institutions, like lenders, rely on the federal funds rate to determine target interest rates on deposit accounts. As the federal funds rate rises and falls, interest rates offered on deposit accounts typically follow that trend. Institutions looking to attract deposits will often offer higher interest rates to attract deposits that are “cheaper” than alternative liabilities, such as borrowing from the Federal Reserve overnight at the federal funds rate or borrowing from correspondent banks. This means that macroeconomic trends such as inflation directly affect depository institutions. By virtue of certain economists’ research indicating that tariffs have a causal relationship to inflation, this belief means that, when seeking to attract depositors, depository institutions must stay acutely aware of macroeconomic factors.

With so much economic uncertainty, only time will tell what the impacts of tariffs and inflation will have on the federal funds rate. For depository institutions, this means that the elusive “sticky deposits,” defined as deposits that are held at an institution for a long period of time, are even more desirable than they typically would be. In general, depository institutions want sticky deposits so that they have access to “cheaper” capital than borrowing from the Federal Reserve or other alternatives, and with the security that the liabilities will not be called (i.e., withdrawn). In a high-interest rate environment, however, consumers are more incentivized to “rate-hop,” where they deposit their funds into a high-interest rate deposit account only to eventually move those funds to another account that offers a higher interest rate. Depository institutions seeking sticky deposits often face stiffer competition during periods of higher interest rates for this very reason.

With interest rates predicted to remain elevated for at least the next several months,[5] depository institutions should consider the following compliance-related considerations:

• Perform additional testing on annual percentage yield (APY) calculations performed by core systems after interest rate changes. While core systems typically have automated controls built into them to calculate APYs according to Regulation DD, it is worthwhile to perform testing to validate the accuracy of the calculations after interest rates have fluctuated.
• Ensure the deposit agreement and associated disclosures accurately reflect the calculation and terms and conditions of interest-bearing accounts.
• If a depository institution is considering a new interest-bearing account, ensure that compliance stakeholders are involved in the product development process and have sufficient authority.
• Carefully evaluate how interest-bearing accounts are marketed to both potential and existing customers. The Consumer Financial Protection Bureau recently sued a depository institution regarding the existence of a high-interest savings account and the Bank’s alleged misrepresentation to customers with a lower-interest savings account.[6]

While only time will tell what (if any) impacts tariffs will have on inflation and how the Federal Reserve will respond, one thing that will remain true is that depository institutions will always have strong demand for sticky deposits to have access to cheaper capital to make loans. Accordingly, and especially in high-interest rate environments, these institutions should stay abreast of their risks and make plans to control them.

[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20250129a.htm

[2] https://www.forbes.com/sites/simonmoore/2025/01/05/heres-the-feds-2025-meeting-schedule-and-what-to-expect-for-interest-rates/

[3] https://www.bbc.com/reel/video/p0kmtx2k/expert-predicts-no-fed-rate-cut-before-june-29-jan-2025

[4] https://www.reuters.com/markets/us/feds-collins-says-fed-can-be-patient-rates-amid-tariff-uncertainty-2025-02-03/

[5] https://www.atlantafed.org/economy-matters/regional-economics/2025/02/03/atlanta-fed-president-bostic-discusses-policy-moves-outlook-for-2025#:~:text=The%20FOMC’s%20projected%20benchmark%20interest,of%20projected%20appropriate%20monetary%20policy.

[6] https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-capital-one-for-cheating-consumers-out-of-more-than-2-billion-in-interest-payments-on-savings-accounts/