Leif Olson, Car Insurance Writer
No, interest rates on savings accounts are not going up. Savings account interest rates are unlikely to go up in the near future, either, even if the Federal Reserve Bank increases the federal funds rate—or the rate at which banks lend money to one another. Normally, savings account interest is loosely correlated with the federal funds rate, but the relationship is dampened by slim bank profit margins.
How Savings Accounts Should Respond to the Federal Reserve
- The Federal Reserve raises the federal funds rate.
- Banks can make loans with higher interest rates, increasing revenues.
- Banks also need deposits for revenue, so they offer higher interest savings accounts.
- High-interest savings accounts at some banks creates inter-bank competition for deposits.
- More banks raise their savings account interest rates to attract deposits and thus originate more loans.
How Excess Savings Are Affecting Savings Account Interest
In times of financial and social unease, people prefer liquid assets to other investments. During the pandemic, American savings account balances soared. While these cash balances have come down somewhat, there remains a glut of savings in the banking system.
In the meantime, the Federal Reserve has indicated it intends to raise the federal funds rate soon—and has begun tapering other economic support mechanisms. Normally, this could mean increased interest for savings accounts as banks pass rate increases to consumers. But banks will struggle to raise rates as they remain flush with reserves while unable to find many profitable loans.
Thus, savers should be aware that a higher federal funds rate will not mean higher savings account interest rates—at least, not immediately. It will take some time for other economic risks to subside and for people to diversify away from savings accounts. Diversification combined with a sustained high-interest rate environment will allow banks to shed deposits and begin offering higher interest rates on savings accounts again.
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