Clark Howard

Why Aren’t My Savings Account Interest Rates Going Up?

By Christopher Smith
By Christopher Smith

By now, you're probably aware that the Federal Reserve is raising interest rates aggressively in an attempt to combat the highest inflation in more than 40 years.

The Fed has raised its benchmark short-term rate three times since March 16, moving the number from effectively zero to 1.75% while signaling that it's currently targeting 3.4% by the end of the year.

Especially if you’re a big saver, this may be encouraging news: a silver lining in the midst of all the fear and negativity surrounding the economy. The interest rates for savings accounts at even high-yield online banks, the best savings rates around, have held at dismal figures for years, often flirting with dipping below 0.5%.

It may seem a little strange, then, when you check your account in the days, weeks or even months after the rate hikes and find the same interest rate you were getting previously — or at least a rate that isn’t anywhere near the one the Fed is quoting.

Why is that? And when might it change?

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Are Bank Interest Rates Any Good Now?

The rate of interest you pay on mortgages, loans and credit cards is ultra-responsive to interest rate hikes. But the national average interest rate for savings accounts has crawled up to just 0.1%. That's despite the aforementioned 1.75% current federal funds rate.

On top of that, inflation hit 8.6% last month. So even if you were getting an interest rate of 1.75%, your purchasing power would be declining rapidly every month.

At least now there's the possibility of some improvement in the near future if you've been studious about putting together a hefty emergency fund or if you've been setting aside a pile of cash for a down payment on a house, a car or a family vacation.

Don’t Expect Much Generosity From Big Banks

The biggest banks are almost always hesitant to raise interest rates very high.

Institutions such as Wells Fargo, Citi, Bank of America and Chase have been on money expert Clark Howard's "naughty" list for many years.

They view customers with deposit accounts as a necessary evil to facilitate profitable loans. But they offer a poor banking experience with an apparent lack of interest in good customer service. Their pesky fees can institute death by 1,000 paper cuts. And they constantly get lapped when it comes to interest rates.

On top of that, big banks are for-profit entities operating a slew of expensive physical locations. Even if they had an incentive to put customers ahead of shareholders, it would be difficult for them to be competitive on rates.

Why Many Banks Haven’t Raised Interest Rates — At Least Not Fast

The Fed cut interest rates to “effectively zero” on April 29, 2020. That’s where they stayed until March 16, 2022.

Those extremely low rates made it challenging for financial institutions to profit on certain products, especially those that paid interest.

The Fed actually controls two interest rates: the federal funds rate, which banks and credit unions use when they lend each other money overnight, and the discount rate, which the Fed uses to lend money to financial institutions. The discount rate, despite its name, tends to be 1% higher than the federal funds rate.

Even for the huge institutions that pay next to nothing in interest, managing every customer’s savings account isn’t free.

Take into account that some of the most competitive banks were offering at least 0.5% interest while making somewhere between 0 and 0.25% when lending the money to other banks.

So for the last few years, some institutions not only had to slash their profits in order to keep providing a decent product; some even went into the red to offer even the most baseline interest rate.

Now, as rates rise, they’re paying themselves before paying their customers.

Another Reason Savings Accounts Are Lagging? Banks Are Flush With Cash

Banks take money for checking and savings accounts in order to loan it out at higher interest to other customers for things like cars and houses.

They need the deposits in order to operate.

However, deposits have skyrocketed for a long time, particularly since February 2020, ballooning from $13.3 billion to more than $18 billion. Consumers got conservative with their money at the onset of COVID-19 and became great savers (temporarily).

"You could say that they are flush with cash, and that therefore, they have no incentive at the moment to offer more attractive rates," said Angelo Kourkafas, an investment strategist at Edward Jones, according to Marketplace.

Not All Banks React To Fed Interest Rate Hikes on the Same Timeline

We've been updating our list lately of the best checking accounts, best savings accounts and best online banks. I've also noticed some confusion around the topic, especially during this period of rapid change.

All banks don’t increase their interest rates at the same time or at the same rate. In general, banks with physical locations are much more hesitant than online banks, credit unions and local banks.

Because rates are changing so often this year, which should continue, banks are also playing a game of leapfrog.

It can be easy to question whether one option really is better than another, especially if the second bank offers a superior interest rate at the moment.

One of the best things to do in times like this is to stick to banks that have consistently offered some of the most competitive interest rates. That’s easier said than done if you haven’t monitored the market for years.

Newer banks that offer competitive interest rates are hard to read as well. Sometimes they are quick to roll back their aggressive promotional rates once they start growing a customer base. But sometimes they last long enough to make it worth opening an account and doing business with them for at least a few years.

Final Thoughts

Interest rates, and the fallout when the Fed changes them, are more complex than it seems at first glance.

For instance, your savings account won’t automatically raise its interest rates just because the Fed is executing rate hike after rate hike. And it may not ever match the current federal interest rate even if it does raise rates.

However, over time, higher interest rates should mean much better yields from savings accounts and CDs. If you’re a saver, at least in the intermediate term, things will become more favorable — especially once inflation starts to settle down.

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