Why is the interest paid on my savings account still so low?
- The Fed has only increased interest rates twice in the past year.
- Banks will raise the amount they charge borrowers before raising what they pay savers.
- Competition for savers hasn’t heated up between banks—yet.
- Some banks have raised rates, though, so it’s worth considering a move.
We’ve heard so much doom and gloom about the Fed’s December decision to increase interest rates and continue doing so throughout 2017 (including a .25 percent increase on March 15): More expensive credit card debt! Higher mortgage rates!
So it’s easy to forget the silver lining: Higher rates are typically a good thing for savers. Assuming banks ever actually raise rates on our savings accounts. Surprise: While banks raced to charge more for money they lend us, they’ve been slow to reward savers.
Painfully slow. DepositAccounts.com says average savings account rates “jumped” from 0.180 percent in late December to 0.182 percent in January—a whole .002 percent. I’ll spare you the math, but that’s not even an extra penny earned each year on a $1,000 balance.
Meanwhile, credit card interest rates have climbed .31 percent in the past six months.
Why are banks so stingy?
First, consider this: The traditional reason banks offer interest to savers is because they want to lend our cash to other people at higher rates.
While modern regulations only require banks to have a small percentage of deposits covering the money they lend, the demand for loans still helps set the demand for savings, says Ken Tumin, creator of DepositAccounts.com. With the economy still moving in fits and starts, we probably can’t expect loan demand to significantly push up the demand for deposits.
Any other reasons we’re not seeing higher rates?
Plain ol’ market forces: Banks won’t raise rates until other banks raise rates. Why should they? “It is very much competitor driven,” Tumin says.
What’s more, banks feel like the Fed gave them permission to freeze rates last year: In late 2015, the Fed signaled it might raise the federal funds rate (at which banks lend to each other) several times in 2016, but only ended up doing so once in December. “Banks want to see two or three rate hikes before they raise the depositor rate,” Tumin says.
Ultimately, though, the real reason we haven’t seen a meaningful uptick might have something to do with “asymmetric price adjustment.”
It sounds complicated, but we already know about this phenomenon from its most obvious example: When the price of oil gyrates, gas prices always go up faster than they go down. For years, economists didn’t believe whiny consumers complaining about this. But recent studies show it’s true: Price “stickiness” usually hurts consumers and helps companies.
In this case, banks are enjoying the widening spread between the price they pay us to hold our money and what they charge to lend it—and are in no hurry to change that.
But there’s hope…
Tumin says he’s recently seen a few Internet banks raise savings and money market account rates. “It’s the first signs there are some upward movements,” he says. “Internet banks tend to be more aggressive.”
We should be, too. Don’t just wait around for better rates to come to your bank—because they may not anytime soon. Instead, keep an eye out for banks willing to take that first step and consider moving your money. According to comparison site Bankrate, more than a dozen banks are already paying out 1 percent or more a year.
January 30, 2017