The Federal Reserve raised its key interest rate Five times this yearmost recently on Wednesday, as part of its ongoing efforts to slow the pace of inflation.
The idea is that since the US central bank By making borrowing money more expensive, the demand for goods and services will fall, causing prices to fall.
A side effect of increased interest rates is that banks can increase the amount of money they pay to consumers who put some of their dollars in savings accounts. As banks earn more from the money they lend, those same institutions can offer higher returns to their customers.
Think of it as the virtuous circle of the savings and lending relationship that banks have with their customers. But until recently, the interest earned on savings accounts wasn’t that impressive.
“Each interest rate is significantly lower than the previous decades,” Bankrate.com chief financial analyst Greg McBride said in an email.
Until this year, McBride said, interest rates have fallen for the better part of 40 years — and so has the amount of money banks put into those accounts.
“Looking back to the early 1980s, the federal funds rate, Treasury yields, and mortgage rates were in the double digits,” he said. “In 1990, the federal funds rate was above 8%, Treasury yields were 7% to 9%, and mortgage rates were 10%.
“By 2020, the federal funds rate was close to zero, Treasury yields were below 2%, and mortgage rates were from 2.5% to 3%.”
Now that those rates are up again, it costs more money.
But this means that there is an opportunity to get higher returns on deposits. McBride advises customers to shop for the best return on their savings.
Not all banks have significantly raised interest rates on savings accounts. According to Federal Deposit Insurance Corp. , the average interest rate on a National Savings Account is 0.17%.
Low interest rates on savings account deposits recently caught the attention of lawmakers on Capitol Hill, who lobbied chief executives of major banks last week about why interest rates haven’t gone up.
“As prices continue to rise, we expect the rates we pay customers to continue to rise,” Wells Fargo CEO Charlie Scharf said in testimony before Congress on Thursday.
Some financial institutions, especially those that operate only on the Internet and do not have real websites, have traditionally advertised higher interest rates through higher yield savings account products. Some of these banks offer more than 1% or 2% — and in some rare cases more than 3% on savings accounts, according to NerdWallet representative Chanelle Bessette.
Bessette said online banks have lower overheads than traditional branches, and they should also do more to compete for deposits.
Bankrate and NerdWallet both provide lists of institutions that currently offer the highest returns. Among them are Discover, Capital One, American Express Savings, and Marcus by Goldman Sachs.
It’s easy to sign up for one of these accounts, even if you do your basic banking elsewhere, said McBride, chief financial analyst at Bankrate.com.
“You can open a savings account online within a few minutes of your time, and link it to the checking account at your existing financial institution in order to move money back and forth seamlessly,” he said. “If your bank has put up a new savings account with a higher yield than the one you’re currently using, just reach out and ask for your money to be transferred to the new higher-yielding account.”
In some cases, McBride said, banks aren’t making it clear to existing customers that they can now get more return from a savings account.
“We’re seeing some scams where banks introduce a new savings account that offers an attractive return while existing account holders stay in the original account at the original rate,” McBride said in an email.
“It is very easy to switch to the new account, but you have to take action to make it happen, the bank will not knock on your door with this opportunity.”
Brian Cheung Contributed.