Why aren’t the interest rates on my savings account going up?
By now you are probably aware that the Federal Reserve is aggressively raising interest rates in an effort to tackle the highest inflation in over 40 years.
The Fed has raised its key short-term rate three times since March 16, taking the figure from zero to 1.75% while signaling that it is currently targeting 3.4% by the end of the year. .
Especially if you’re a big saver, this can be encouraging news: a silver lining amid all the fear and negativity surrounding the economy. Savings account interest rates, even at high-yield online banks, the best savings rates around, have hovered at dismal numbers for years, often flirting with drops below 0, 5%.
It might seem a bit odd, then, when you check your account in the days, weeks, or even months after the rate hikes and find the same interest rate you were getting before – or at least one that is not at all close to that the Fed quotes.
Why is that? And when could that change?
Are bank interest rates good now?
The interest rate you pay on mortgages, loans and credit cards is ultra sensitive to interest rate increases. But the national average interest rate for savings accounts has climbed to just 0.1%. This is despite the current federal funds rate of 1.75% mentioned above.
Moreover, inflation reached 8.6% last month. So, even if you received an interest rate of 1.75%, your purchasing power would decline rapidly each month.
At least now, there’s the possibility of some improvement in the near future if you’ve been diligent about building up a big emergency fund or setting aside a stack of cash for a down payment on a house, a car or a family vacation.
Don’t expect much generosity from the big banks
The biggest banks are almost always reluctant to raise interest rates very high.
Institutions such as Wells Fargo, Citi, Bank of America and Chase have been on financial expert Clark Howard’s list of “bad guys” for many years.
They view clients with deposit accounts as a necessary evil to facilitate profitable lending. But they offer a poor banking experience with an apparent lack of interest in good customer service. Their pesky charges can institute death by 1,000 paper cuts. And they are constantly outperformed when it comes to interest rates.
On top of that, big banks are for-profit entities operating a multitude of expensive physical locations. Even if they had an incentive to put customers before shareholders, it would be difficult for them to be competitive on prices.
Why Many Banks Didn’t Raise Interest Rates – At Least Not Quickly
The Fed cut interest rates to “effectively zero” on April 29, 2020. That’s where they stayed until March 16, 2022.
These extremely low rates made it difficult for financial institutions to take advantage of certain products, especially those that paid interest.
The Fed actually controls two interest rates: the federal funds rate, which banks and credit unions use when they lend money to each other overnight, and the bank rate, which the Fed uses to lend money to financial institutions. The discount rate, despite its name, tends to be 1% higher than the federal funds rate.
Even for large institutions that pay next to nothing in interest, managing each customer’s savings account is not free.
Take into account that some of the most competitive banks offered at least 0.5% interest while earning between 0 and 0.25% when lending money to other banks.
So, over the past few years, some institutions have not only had to cut their profits to continue providing a decent product; some even went into the red to offer even the lowest interest rate.
Now, as rates go up, they pay themselves before they pay their customers.
Another reason why savings accounts are lagging? The banks are full of money
Banks take money from checking accounts and savings accounts to lend it out at a higher interest rate to other customers for things like cars and houses.
They need repositories to work.
However, deposits have skyrocketed for a long time, especially since February 2020, from $13.3 billion to over $18 billion. Consumers became conservative with their money at the onset of COVID-19 and became big savers (temporarily).
“You could say they’re full of cash and therefore don’t have any incentive right now to offer more attractive rates,” said Angelo Kourkafas, investment strategist at Edward Jones, according to Marketplace.
Not all banks respond to Fed interest rate hikes in the same time frame
We recently updated our list of the best checking accounts, the best savings accounts, and the best online banks. I’ve also noticed some confusion around the subject, especially during this time of rapid change.
Not all banks raise their interest rates at the same time or at the same rate. In general, banks with physical locations are much more hesitant than online banks, credit unions, and local banks.
Because rates are changing so often this year, which is likely to continue, banks are also playing a leapfrog game.
It can be easy to wonder if one option is really better than another, especially if the second bank is offering a higher interest rate right now.
One of the best things to do in times like this is to stick with banks that have historically offered some of the most competitive interest rates. That’s easier said than done if you haven’t watched the market for years.
New banks that offer competitive interest rates are also difficult to read. Sometimes they are quick to cancel their aggressive promotional rates once they start building a customer base. But sometimes they last long enough to make it worth opening an account and doing business with them for at least a few years.
Interest rates, and the fallout when the Fed changes them, are more complex than it first appears.
For example, your savings account will not automatically increase its interest rates just because the Fed executes rate hike after rate hike. And it may never match the current federal interest rate, even if it raises rates.
However, over time, higher interest rates should mean much better returns from savings accounts and CDs. If you are a saver, at least in the medium term, things will become more favorable, especially once inflation starts to subside.