Why your savings interest rate is low: Banks don’t want your money right now


US interest rates and inflation are on the rise again, which means Americans can expect to pay higher rates for mortgages, auto loans, and credit cards. But don’t expect it to lead to higher interest on your savings account anytime soon.

Banks don’t want your money. That’s why they’re offering such low rates.

Today, the average US savings account pays 0.06 percent interest annually. Put another way, in one year a saver will earn just $6 in interest on $10,000 in deposits. Even many of the top online “high-yield savings accounts” in the US pay a negligible 0.5 percent interest annually. And the average one-year certificate of deposit (CD), typically one of the highest-yielding savings vehicles, pays 0.15 percent.

While savings accounts and CD yields are at historic lows, inflation this year is expected to increase at the fastest pace since 1991, eroding consumers’ purchasing power and reducing the value of their dollars. Normally, high inflation leads to higher interest rates that translate to higher rates on savings accounts as banks seek out deposits. But that’s not the case in 2021.

In July, Americans who put their money in savings accounts were hit with the most negative real average savings rate in US history: -5.34 percent.

At that rate, $10,000 deposited in a savings account would be worth only $9,460 in equivalent dollars at the end of a one-year period. In essence, the saver loses $540 in buying power to earn $6 in interest.

Yet, Americans are pouring money into savings accounts at a historic rate. The US personal savings rate in 2020 rose to 13.7 percent, the highest in the 62-year history of the measure; in 2021, it has so far averaged near that rate.

The buildup in savings is the byproduct of a confluence of events related to the Covid-19 pandemic: a reduced ability to spend on service-related purchases such as dining out and travel, government support like stimulus checks and enhanced unemployment benefits, and fear that the February 2020 to April 2020 recession would cause financial instability and wide-ranging job losses. It was also a call to action for many, as more than half (51 percent) of Americans have less than three months’ worth of emergency savings.

However, financial professionals say the call has now gone too far, especially given the paltry payoff for those who save.

“We are seeing clients with too much cash in their portfolios, and that could impact their purchasing power,” says Michael Briese, a senior vice president and private client adviser at J.P. Morgan Wealth Management. “Think about it this way: If the economy grows and prices rise but your savings stay the same, what you can buy with that money shrinks in the long term.”

Banks have been inundated with deposits from consumers since the start of the pandemic. Cash assets at commercial banks totaled $4.7 trillion as of September 15. That’s more than double the $1.8 trillion of cash held at such banks in February 2020.

The trend is a reversal of the one that had been in place from 2014 to 2019 when Americans — seemingly fed up with near-zero returns on their savings accounts — started pulling money out of commercial banks. Between October 2014 and October 2019, commercial banks’ cash assets declined from just under $3 trillion to around $1.7 trillion.

“All this money has been deposited but banks can’t find good loans to make,” Gary Zimmerman, founder and CEO of fintech savings vehicle MaxMyInterest, says. “There’s been a big slowdown in lending, and because banks have more deposits than they can find a home for, their only option is to try to lower their interest rates to get you to go away. Large lending institutions are actively hoping you’ll withdraw your money.”

Data from the Federal Reserve show that as deposits have grown, loans have fallen, in large part because banks are also socking away money in the form of securities guaranteed by the federal government. And while mortgage lending has largely held up, thanks to the booming US real estate market, commercial and industrial loans have been in freefall since May 2020, declining by nearly 20 percent.

The share of total assets devoted to loans at the 25 biggest US banks fell to the lowest level in the nearly 36-year history of the Fed’s weekly data this year. The ratio of loans to deposits at US banks also fell to its lowest level on record in the second quarter, according to S&P Global Market Intelligence’s database, which dates back to 2003.

In theory, banks need deposits to be able to make loans, which are their primary revenue driver. But in reality, the Federal Reserve — the all-powerful central bank of the United States — pushed the reserve requirement ratio (RRR) to zero percent in March 2020.

The RRR is the ratio of actual cash banks must hold in relation to how much money they lend. If the reserve requirement ratio is 10 percent, banks that want to lend $100,000 must hold $10,000 in cash. With the ratio at zero, commercial banks have the ability to lend much more money without needing a corresponding increase in deposits.

In addition to taking RRR to zero percent, the Fed also has been flooding markets with cash through its quantitative easing (QE) program since March 2020, pushing $120 billion into the economy every single month. That gives banks further access to capital and even less reason to incentivize consumers to save or make deposits.

Making it unattractive to save is a feature, not a bug, of the Fed’s policy. Low interest rates and abundant capital are intended to push consumers to buy instead of save or to take additional risk and do things like start a business or take out a second mortgage on a home in order to spend more money.

The goal is that this money gets out into the economy and encourages businesses to hire more workers and pay them more money, furthering a virtuous circle of spending that benefits everyone.

But some argue that the Fed’s extraordinary support since the start of the pandemic has not helped the economy as much as it has fueled asset bubbles in stocks, real estate and even commodities as more investors borrow money that they use to speculate in these markets.

The effects can be seen in the rise of not just the overall stock market and housing prices, but in cryptocurrencies (hailed as a savings asset that the Fed can’t manipulate), the frenzy in “meme stocks” like GameStop and AMC, and in the skyrocketing price of trading cards, art and things like non-fungible tokens, or NFTs.

Investors are largely just following the lead of US companies, which borrowed a record…


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