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Auditor Dean LeBlanc asks:
Since interest rates are rising and banks are charging more interest on loans, why is the interest rate on my savings account still around [a fraction] of what it was 30 years ago? What would encourage banks to charge higher rates on savings accounts?
When the Federal Reserve raises interest rates, the rates on your savings accounts usually increase accordingly. But while the Fed has raised rates a total of 75 basis points since the start of the year, savings rates have barely followed suit.
Since April 2021, the national average interest rate on savings accounts has largely stood at 0.06%, reaching just 0.07% last month.
That’s because banks have too many deposits right now, say financial experts. Last month, commercial banks held more than $18 trillion.
“You could say they’re full of cash, so they don’t have any incentive right now to offer more attractive rates,” said Angelo Kourkafas, investment strategist at Edward Jones.
Typically, banks make money on the difference between what they charge for loans and what they pay for deposits, Kourkafas said. And in recent years, the difference between these two has narrowed.
In 2020, at the start of the pandemic, households were saving more and borrowing less because they were unable to spend money due to the lockdown, Kourkafas said. Congress has also approved stimulus packages amounting to $803 billion in payments.
On top of that, consumers were risk averse and wanted their money in cash, said Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts.com, a bank account comparison site. Deposits increased sharply from $13.4 trillion to $15.3 trillion between February and May 2020.
In 2020 and 2021, personal loans and credit card balances have declined.
“So banks actually saw less growth on their loans, while they had strong growth on deposits,” Tumin said. “The purpose of deposits is to fund loans, so they didn’t need to attract deposits to fund those loans.”
But while savings rates are low on average for traditional banks, Tumin said online savings accounts earn a higher return. Some banks offer rates as high as 1.25%.
He said online banks are responding faster and have raised savings rates by about 8 basis points this year (compared to a paltry 1 basis point increase in the national average).
Tumin said online banks offer higher rates because they don’t have to maintain an expensive branch network and there is greater competition because consumers can quickly move their money from bank to bank. ‘other. People using traditional banking services, on the other hand, tend to leave their savings in place because they are not particularly “rate sensitive”.
Online savings rates could eventually push more traditional brick-and-mortar banks to raise rates so they can compete, he added.
And Kourkafas said he believes as the Federal Reserve continues to raise rates, your savings account returns may slowly increase in the coming months.
Consumer savings could decline, in part due to rising inflation, he said. So banks might eventually want to attract more deposits.
The Fed is expected to raise rates five more times this year and plans to raise rates by 50 basis points at its next two meetings. Fed Chairman Jerome Powell also told “Marketplace” host Kai Ryssdal in an interview that the Fed is “ready to do more” and that a 75 basis point hike is not not out of place.
A big question going forward, Kourkafas and Tumin said, is: Will there be a recession? Some big banks say yes, although some economists think it can be avoided.
If a recession hits, it will lead to lower consumer spending, which usually means fewer people taking out loans, Tumin explained. And if demand for loans declines, banks won’t need deposits, which will keep deposit interest rates low — even if the Fed raises rates.
Despite the low returns on savings, Tumin said the bank is an “appropriate place” to keep your money if it’s part of an emergency fund or your short-term goals and expenses. But for long-term goals, you should think about investing in options like mutual funds and exchange-traded funds.
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