Try to buy a car or a house and you will find that interest rates on loans are higher than they have been in years.
So why don’t you even earn 1% interest on your savings or checking account?
According to Ken Tumin, founder of DepositAccounts.comthat tracks and compares bank rates.
In the Sacramento area, the majority of banks and credit unions offer 0.01% to 0.75% annual percentage return, according to deposit accounts. There are better deals with certificates of deposit. Citibank, for example, offers California residents a 1.5% rate on an 11 month CD.
But rates just aren’t going to skyrocket anytime soon. Financial institutions are following the Federal Reserve, and even though it raises rates, its target federal funds rate is still only in the 0.75-1% range.
“Fed rate hikes have not been meaningful and we are still emerging from historically low rates to combat the pandemic and business closures,” said Stephen Andrews, President and CEO. of Western Bankers, in an email to The Bee. Western Bankers is a banking trade association that serves the western states of the United States, including California.
Andrews added that there was a lack of demand for loans, due to stimulus dollars still on bank balance sheets and potential borrowers worried about the lingering pandemic, societal tensions and war in Ukraine.
“As a result, banks have less flexibility to raise savings rates as loan demand slows,” he said.
The rate is used by banks that borrow and lend excess reserves to each other overnight. It is the Fed’s primary tool for trying to expand or restrict economic growth.
As inflation hits 40-year highs, the Fed is expected to impose up to five more rate hikes this year. Its action spills over into the consumer market; rates for a 30-year mortgage have averaged around 5.25%.
Based on history, there could be a few more Fed increases “before we see broad-based and meaningful gains in online savings account rates,” Tumin said.
The good news is that “savings rates are going up, if you’re looking in the right place. Small banks and online banks that are hungry for more deposits have increased their payouts and this will grow as the Federal Reserve raises interest rates,” said Greg McBride, chief financial analyst at Bankrate.com.
The Fed started raising its key rates in March. It raised rates again this month and further hikes are expected in June, July and this fall. It aims to calm the huge post-pandemic demand for goods and services, which is expected to slow price increases.
This is particularly good news for banks, which are trying to recover from last year, when the difference between what they earned on loans and what they paid for their own funding was at a level record.
As a result, McBride said, “lending rates will rise more than deposit rates so banks can see some recovery in margins.”
There is another reason why consumer savings rates are expected to rise slowly. Many banks hold deposits and must lend money before trying to attract more.
Their situation is “much like a company with two warehouses full of goods won’t order again until it sells what it has on hand,” McBride said.
Consumers can often fare better using online banks, the data shows. These banks don’t have the same branch and brick-and-mortar expenses.
“Online banks have a habit of moving faster as rates go up. Not only do they move faster with their deposit rates, but their deposit rates go up a lot more,” Tumin said.
If the Fed continues to raise rates as it has signaled, Tumin predicted that consumer rates by the end of 2022 will be similar to what they were at the end of 2018, after the Fed spent three years raising rates.
“If online savings account rates track the federal funds rate as they did in 2018, online savings account rates should be close to the federal funds rate,” he said. declared. Depending on what the Fed does, that could mean rates anywhere from 1.5% to 3.5% by the end of next year.
McBride saw another benefit.
“For money you might need at any time, like your emergency savings, put it in an online savings account where you can benefit from rising interest rates but have access to money when you need it and federal deposit insurance protection,” he said. said.
But don’t rely on bank interest rates for a big windfall.
“For longer-term goals like retirement, you’ll need to invest more aggressively, with a heavy equity weighting to get the growth you need,” he said.
This story was originally published May 26, 2022 5:00 a.m.