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Why has it taken so long for savings account interest rates to start rising?

Nancy Marshall-Genzer Sep 16, 2022
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Online banks tend to pay the highest rates on savings accounts because they don't have the same overhead costs as brick-and-mortar banks. Frederic J. Brown/AFP via Getty Images

Why has it taken so long for savings account interest rates to start rising?

Nancy Marshall-Genzer Sep 16, 2022
Heard on:
Online banks tend to pay the highest rates on savings accounts because they don't have the same overhead costs as brick-and-mortar banks. Frederic J. Brown/AFP via Getty Images
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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 point of raising interest rates is to cool demand by making it more expensive to borrow money. While that hurts if you want to buy a house or car, or take out a student loan, the upside is that we should be earning more on our savings.

Yet the average rate on a savings account is a paltry 0.13%, according to Bankrate. That’s partly because of our old friends: supply and demand.

Over the past few years, people fattened up their savings account balances with pandemic relief money, said Lauren Goodwin, an economist at New York Life Investments. So “banks have more deposits than they can find a home for.”

Banks use the money in our savings accounts to make loans. But they have more deposit money than they need for those loans right now. The glut of deposits is getting smaller though. Goodwin credits the end of pandemic relief programs and the fact that people are getting out and spending more.

“The supply and demand that banks have for cash, that dynamic is changing again. And that’s part of the reason why we are starting to see saving and checking rates move a little bit higher.”

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 large, traditional brick-and-mortar banks do,” she said.

But even online interest rates on savings accounts are still below where they were the last time we had a series of interest rate increases from the Fed several years ago. At the beginning of 2019, online banks were offering an average rate of about 2.2% on savings accounts, according to Ken Tumin, senior savings analyst at LendingTree. Now the online average is about 1.8%.

Tumin said part of the problem is banks aren’t lending as much now. “As loan growth goes down, banks have less of a need for deposits and less of a reason to raise rates.”

Unlike in 2019, some banks today are worried about a recession, Tumin added. That means they’re pickier about who they lend money to because more people default on loans during economic slowdowns.

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