Why are savings account interest rates rising so slowly?
We’ll see how aggressively officials plan to fight inflation going forward when the Federal Open Market Committee meets next week. The Fed has been raising interest rates for about five months now.
The purpose of raising interest rates is to cool demand by making it more expensive to borrow money. Although it hurts if you want to buy a house or a car, or take out a student loan, the upside is that we should earn more from our savings.
Yet the average savings account rate is a measly 0.13%, according to Bankrate. It’s partly because of our old friends: supply and demand.
Over the past few years, people have fattened their savings account balances with pandemic relief money, said Lauren Goodwin, an economist at New York Life Investments. Thus, “banks have more deposits than they can find”.
Banks use money from our savings accounts to make loans. But they have more deposit money than they need for these loans right now. The overabundance of deposits is diminishing, however. Goodwin credits the end of pandemic relief programs and people getting out and spending more.
“Banks’ cash supply and demand, that dynamic is changing again. And that’s part of the reason why we’re starting to see savings and checking rates go up a bit.
Online banks pay the highest rates on savings accounts — sometimes 10 times higher than the average rate, according to NerdWallet’s Chanelle Bessette.
“And that’s because online banks don’t have the overhead that big traditional banks have,” she said.
But even online interest rates on savings accounts are still lower than they were the last time we had a series of interest rate hikes from the Fed several years ago. years. In early 2019, online banks were offering an average rate of around 2.2% on savings accounts, according to Ken Tumin, senior savings analyst at LendingTree. Now the online average is around 1.8%.
Tumin said part of the problem is that banks aren’t lending as much now. “As loan growth declines, banks have less need for deposits and less reason to raise rates.”
Unlike 2019, some banks are now worried about a recession, Tumin added. This means they are more picky about who they lend money to, as more people default on their loans during economic downturns.
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