October 14, 2022

Why Do Interest Rates on Savings Accounts Remain So Low in a Rising Rate Environment?

By Sylvia Salguero, Financial Advisor

In recent months the Federal Reserve has been engaged in a campaign of raising interest rates aggressively, in its effort to tame the inflation monster. Thus far this has affected mortgage rates (which have doubled since the beginning of the year to 7%), car loans, and credit-card balances.

However, the yield on a bank savings account averages now a paltry 0.14%. In the opinion of Wall Street Journal’s Joe Pinsker, banks keep payouts low on customers’ savings because they have plenty of deposits to cover their lending businesses without the need to attract new depositors.

FDIC (Federal Deposits Insurance Corporation) reported in June that commercial banks held $16.8 trillion in deposits; most of this sum is sitting in individual checking and savings accounts. For their part, customers, according to studies conducted both in the US and the UK are reluctant to change banks, due to a perceived huge hassle involved, thus the inertia in keeping accounts where they are, regardless of other options.

Actually, some banks, particularly online ones, have begun to inch up their yields to the highest they have been since 2009. UFB Direct, for example, is paying 3.1% according to Bankrate.com. Of course, even high-yield savings accounts do not protect from the 8.3% year-over-year inflation, but the annualized returns of 2-3% are better than 0.14%, especially if one tends to keep large balances in one’s bank account.

For a comprehensive review of your personal situation, always consult with your legal or tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.