Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates / Why Central Banks Are Watching the Savings Glut
Transcript
- Lucas: So we talk a lot about how central banks set rates, but there's a quieter force that's been distorting their transmission mechanism for years now — and it's sitting in your bank account. Luna: You mean the savings glut. Lucas: Exactly. The global savings glut — a term that Ben Bernanke popularized back in 2005 — but it's taken on a new life post-pandemic. Households in the U.S. alone amassed over two trillion dollars in excess savings during 2020 and 2021, and even after four years of spending down, the personal saving rate is still running at 7.8 percent as of Q2 2026. That's way above the pre-pandemic average of about 5.4 percent. Luna: So people are still hoarding cash more than they used to, even after inflation and rate hikes. Why does that matter for central banks? Lucas: Because it changes the entire transmission of policy. When a central bank raises rates, the classic channel is that higher borrowing costs choke off demand — fewer car loans, fewer mortgages, less corporate investment. But if households are sitting on a giant pile of liquid savings, they don't need to borrow. They can just tap their deposit accounts to fund spending. Luna: Which means rate hikes are less effective. And we've actually seen that — the economy has been surprisingly resilient through this tightening cycle. Lucas: Right. The personal saving rate data from the Bureau of Economic Analysis shows that even as the Fed raised rates by over five hundred basis points, the saving rate didn't collapse. In fact, it bottomed around 3.4 percent in mid-2022, then climbed back to 7.8 percent by this quarter. That suggests households are still cautious — they're rebuilding buffers, not spending recklessly. Luna: So the savings glut acts like a shock absorber. It blunts the impact of both tightening and easing — because when rates eventually come down, people might not rush to spend either. Lucas: Exactly. And that's the part that's tricky for central bank models. Most standard macro models assume that when you cut rates, consumption jumps. But if the typical household already has plenty of liquidity, a rate cut might not stimulate much extra spending. It's a structural shift in the propensity to consume out of current income. Luna: Which brings us to the neutral rate — because if savings are structurally higher, then the rate that neither stimulates nor restricts the economy — the so-called R-star — might also be higher, right? Lucas: That's the big debate right now. We covered the neutral rate back in episode 113 and 114, but the savings glut adds a new layer. If households want to save more at any given level of income, then to keep the economy at potential, you need a higher real interest rate to bring savings and investment into balance. So R-star might have risen because of the glut, not despite it. Luna: Wait — that seems counterintuitive. More savings usually pushes rates down, like when China sent its savings abroad and we got lower bond yields in the 2000s. Lucas: That's the old Bernanke story — excess global savings flowing into U.S. Treasuries pushed yields lower. But that was a capital flow phenomenon. What we're talking about now is domestic household savings within the U.S. — money sitting in bank accounts rather than being spent. That reduces the velocity of money and can actually be contractionary, forcing the central bank to keep rates higher to prevent overheating in non-consumption sectors like housing or financial markets. Luna: So the savings glut is not one monolithic thing. It matters where the savings come from — foreign or domestic, corporate or household. Lucas: Exactly. And the composition matters for policy transmission. The Fed's own research has shown that the marginal propensity to consume out of liquid wealth — things like checking accounts — is about three times higher than out of illiquid wealth like housing or retirement accounts. So when the glut is concentrated in liquid deposits, it has an outsized effect on spending sensitivity to rates. Luna: And that's a newer phenomenon. Before 2020, households didn't have that kind of liquidity cushion. The saving rate in 2019 averaged just 5.4 percent, and it had been trending down since the late 2000s. Lucas: So the question for central banks is whether this elevated saving rate is permanent or transitory. If it's permanent, they need to adjust their reaction functions. For example, the Bank of England has started incorporating a household liquidity index into its forecasting models. The Fed's staff now track a 'savings overhang' metric derived from the national income accounts. Luna: Have any central banks explicitly changed policy because of the savings glut? Lucas: Not explicitly in their statements, but you can see it in the dots. Look at the June 2026 dot plot. The median estimate for the long-run federal funds rate — that's the neutral rate — moved up to 3.75 percent from 3.0 percent in 2024. Many FOMC members cited structural factors like demographics, productivity, and yes, savings behavior as reasons for the revision. Luna: So the savings glut is one reason the neutral rate is higher. But it also affects the term premium — the extra yield investors demand to hold long-term bonds. If lots of savings are sitting in short-term deposits, that pushes up the term premium on long-dated Treasuries because the market demands compensation for duration risk. Lucas: That's a great point. The term premium on ten-year Treasuries has been positive again recently — around 30 to 40 basis points — after being negative for most of the 2010s. Some of that is fiscal deficits and quantitative tightening, but the savings glut plays a role too. When households prefer short-term liquidity, the government has to issue more long-term bonds to match demand, and that pushes up long-term yields. Luna: It's like a feedback loop. More savings -> higher neutral rate -> higher term premium -> tighter financial conditions -> but savings stay elevated because people are uncertain about the future. Lucas: Right. And that's the part that worries central bankers. If the savings glut persists because of uncertainty — fear of recession, geopolitical risk, climate change — then it's not really a 'glut' in the sense of voluntary thrift. It's a precautionary savings motive. And that's harder to model. Luna: The ECB has been studying this too. They put out a working paper earlier this year showing that the euro area household saving rate is still about two percentage points above what their pre-pandemic model would predict, even after controlling for income and wealth effects. Lucas: Which means the effect is not just American. It's a developed-market phenomenon. And if central banks don't account for it, they risk either overtightening — because they think the economy is stronger than it is — or under-tightening — because they think savings will cushion the blow but then the cushion doesn't materialize. Luna: So where does that leave us? Is the savings glut something investors should be watching as a leading indicator for policy shifts? Lucas: Absolutely. I'd argue it's one of the most underappreciated metrics right now. If the personal saving rate starts to fall toward 5 percent again, that tells you the precautionary motive is easing, and the Fed might have more room to cut. But if it stays above 7 percent, then the economy is effectively running on a different set of rules — and the neutral rate might be structurally higher. Luna: It also affects which sectors benefit. If savings are high, consumers are less sensitive to rate cuts, so cyclical stocks like housing and autos might not get the usual boost. Instead, you'd see more demand for safe assets, and that could keep the yield curve steep. Lucas: Good point. And that's the kind of insight that comes from watching the savings data, not just the Fed's next headline rate. The BEA releases the personal saving rate with a one-month lag, but it's available for free. Anyone can track it. Luna: Speaking of tracking — one thing that helps us keep producing episodes like this is that some listeners chip in through buy me a coffee dot com slash fexingo. It's not a big ask, but it's what keeps the show free and ad-free for everyone. Lucas: Yeah, it's straightforward. If walking through the economy with us has made something click — maybe the savings glut or the neutral rate — and you want to help keep this going for others, that's how. No pressure, just a genuine thank you to those who do. Luna: All right, back to the glut. Lucas, is there a historical parallel? Have we seen a similar episode of sustained high saving rates? Lucas: The 1970s and early 1980s had elevated saving rates — around 10 to 12 percent — but that was largely driven by high interest rates and inflation uncertainty. Today's is different because it's not driven by high rates — rates were near zero when the glut built up. It's more behavioral — a scar effect from the pandemic. People saw their incomes disappear overnight and decided they needed a bigger buffer. Luna: So it's a psychological shift, not just an economic one. That makes it harder to reverse. Lucas: Exactly. And that's why central banks are watching it. If this saving behavior persists, it changes the baseline for everything — the neutral rate, the term premium, the effectiveness of forward guidance. The old rules of thumb might not work. Luna: One last thing — does the savings glut explain why the economy hasn't tipped into recession despite such aggressive tightening? You hear that question a lot. Lucas: I think it's a big part of the answer. Normally, when the Fed hikes this fast, the housing market collapses, consumer spending drops, and unemployment rises. We've seen some slowdown, but nothing like previous cycles. The savings cushion allowed households to keep spending even as borrowing became more expensive. It's the 'dry powder' that kept the expansion alive. Luna: So maybe the real story of the 2020s isn't inflation or interest rates — it's the mountain of cash that quietly changed how the economy responds to policy. Lucas: I think that's exactly right. And it's a reminder that sometimes the most important forces are the ones sitting in plain sight — in your bank account.