[Real-Life Finance] Interest Rates Drop VS Wake Up... What to Do with Lump Sum Money

Active Use of Short-Term Deposits and Parking Accounts

Investors are confused as interest rate forecasts diverge between the U.S. Federal Reserve (Fed) and the market. While Fed Chair Jerome Powell still maintains a somewhat cautious stance, the market seems optimistic, viewing a 'rate cut as a matter of time.' Financial experts suggest it is better to hold a short bat and observe the market situation rather than betting prematurely.

The direction of interest rates switching between optimism and pessimism is 'still unknown'

On the 1st, Jerome Powell, Chair of the U.S. Federal Reserve (Fed), stated in a speech at Spellman College in Atlanta, "It is still too early to speculate whether we have tightened enough or when we will ease this policy, and it is premature to guess the timing of a rate cut," emphasizing, "The recent slowdown in inflation is welcome but must be sustained, and if inflation needs to be lowered further, the benchmark interest rate could be raised again." This was a clear warning against the growing expectations on Wall Street for a rate cut.

Earlier, after the Federal Open Market Committee (FOMC) regular meeting last month, Powell had said in a press conference, "We are not thinking about cutting rates at all." He remains concerned about the possibility of rising prices and insists that monetary tightening policies must continue until key figures such as the Consumer Price Index (CPI) return to target levels.

The market’s initial interpretation was the opposite. It is effectively competing to time the rate cut next year, believing that the tightening era is over. This is based on signs of economic slowdown, such as retail sales decreasing by 0.1% in October compared to the previous month.

According to the FedWatch tool from the Chicago Mercantile Exchange (CME), the federal funds futures market sees nearly a 60% chance that the Fed will cut the benchmark interest rate by at least 0.25 percentage points in May next year. This is nearly double the 29% level at the end of last month. Bank of America (BoA) also expects a soft landing and predicts rate cuts will begin in June next year. Earlier, UBS, Switzerland’s largest investment bank, forecasted a U.S. rate cut in March next year. Vanguard and Goldman Sachs expect rate cuts to start in the second half of the year.

However, another reaction emerged within days. Some voices urged caution against excessive optimism by reinterpreting Powell’s remarks. British investment bank Barclays said the market’s expectations for rate cuts are excessive and predicted the Fed would only cut rates by 1 percentage point next year.

Kim Il-hyeok, a researcher at KB Securities, explained, "Considering Powell’s and the Fed’s caution in securing additional evidence, it is unlikely that the gap between the market and the Fed’s views will narrow significantly in the FOMC dot plot to be released after the 12th-13th (local time). Until sufficient tightening effects on employment and inflation are confirmed, it will take time for the Fed’s stance to shift toward cutting the benchmark interest rate."

Parking accounts, short-term deposits: hold the bat short

As the divergent views between the market and central banks on future benchmark interest rates continue, financial consumers’ concerns are deepening. According to the Korea Financial Investment Association, as of the 24th, the size of investor deposits in the domestic stock market was 47.4975 trillion won, slightly up from 46.0569 trillion won at the end of last month but significantly below the year’s peak of 55.9865 trillion won at the end of July. Although expectations for rate cuts are growing, these expectations have not translated into asset market inflows.

Financial experts advise adopting an investment strategy with short maturity structures when interest rate forecasts are uncertain. This is because having short maturities in financial products such as deposits allows for quick responses regardless of the direction interest rates move.

The same applies to fixed deposits. According to the financial sector, as of this date, the six-month fixed deposit interest rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) ranged from 3.95% to 4.05%, which is the same level as the one-year fixed deposit rates (3.95% to 4.05%). Since the beginning of this month, as the possibility of rate cuts has emerged, short-term deposit rates have inverted with longer-term fixed deposit rates, and this trend continues.

An official from a commercial bank said, "Since interest rates are expected to fall in the future, we are increasing the proportion of short-term deposits instead of long-term deposits to reduce funding costs," adding, "If market interest rates continue to decline as they are now, normalization could happen quickly, so it is also a good idea to hurry and sign up to keep the maturity structure short."

Demand deposit products, commonly called 'parking accounts,' are also one of the means to manage funds during times when it is difficult to predict the direction of interest rates. Because parking accounts allow free deposits and withdrawals, if rates fall, funds can be withdrawn immediately for aggressive investments, and if rates rise, funds can be placed in fixed deposits or other products.

Recently, products offering up to 7% annual interest have appeared, mainly in the savings bank sector, targeting financial consumers. The savings bank sector, which has started soundness management, has been raising funds through parking accounts rather than competing on deposit interest rates this year.

OK Savings Bank launched the 'OK Pay Account,' a parking account offering up to 7% annual interest, on the 1st. Deposits up to 500,000 won receive a 4% annual interest rate, and deposits exceeding 500,000 won receive a basic interest rate of 0.5% annually. Additionally, if the OK Pay Account is registered as a payment or recharge account with one of four simple payment providers?Naver Pay, Kakao Pay, Payco, or Toss Pay?a preferential interest rate of 3% annually is provided.

Accuon Savings Bank recently raised the interest rate on its parking account, 'Plus Free Deposit,' from 3.6% to 3.9%, an increase of 0.3 percentage points. Furthermore, if customers agree to the collection and use of personal information and join the Accuon Membership Plus, a preferential interest rate (0.2 percentage points) is applied, allowing deposits up to 20 million won to receive a maximum annual interest rate of 4.1%. Shinhan Savings Bank offers a maximum interest rate of 3.5%, which is lower compared to other banks, but the deposit limit for this rate is 100 million won.