U.S. interest rates are at their highest level in more than a decade, a fact many savers have cheered. As the Federal Reserve hikes rates, savers are supposed to receive more interest on the money they hold in the bank. But so far, that’s not happening.
JPMorgan Chase, the nation’s largest bank, is paying 0.01 percent interest on a basic saving account, the equivalent of a dime a year for someone holding $1,000 at the bank. Bank of America is offering 0.03 percent interest and Wells Fargo is paying 0.01 percent, according to Bankrate.com.
The Fed left interest rates unchanged Wednesday when central bank leaders wrapped up their first meeting of the year to assess the health of the U.S. economy.
The interest rate that the Fed sets — known officially as the Federal funds rate — is the one that banks charge each other. Banks can turn around and set whatever rates they want for customers. Typically, banks raise the interest rates they pay savers when they want to attract deposits and win new customers. But right now analysts say large banks are flush with deposits and see little need to pay higher rates.
“Depositors have to be choosy about where they put their money. Many banks — the biggest banks in particular — continue to be stingy with their payouts,” said Greg McBride, chief financial analyst at Bankrate. “You can easily grow your interest earnings tenfold just by moving your money to a bank with a more attractive rate. ”
To earn a higher rate, McBride encourages savers to look at online banks and smaller banks, which often pay a lot more interest and are still insured by the Federal Deposit Insurance Corporation, meaning deposits up to $250,000 are safe no matter what happens to the bank. Vio Bank is offering 2.39 percent interest, for example, and State Farm Bank is paying 2.25 percent.
Savers are also told to consider putting money into CDs, certificates of deposit where borrowers lock in a higher interest rate for a year (or more) by promising not to make any withdrawals. But even CDs are only paying an average interest rate of 0.89 percent. That’s the biggest spread between the Fed’s interest rate and the 1-year CD ever, according to Bankrate, a sign of just how much savers are getting hurt if they don’t aggressively shop around for better rates.
Historically, savers have earned rates a lot closer to the Fed’s interest rate because banks were hungry for more deposits they could use to lend, and competition among banks forced most to push rates higher. But experts say that’s not happening now because people rarely switch banks. The big banks are not worried about losing customers, and they have sufficient funds on hand to lend.
“Competition among banks has not reached levels where banks need to raise CD rates,” said Kenneth Leon, global director of research at CFRA, an independent analysis firm. He points out that deposits at most large banks like Bank of America have been growing lately despite the low rates. (The one exception is Wells Fargo, which has struggled after numerous scandals, including the creation of fake accounts.)
While many Americans say they want to shop around for a bank that better serves them, few actually do. A Bankrate survey in 2017 found that Americans have used the same bank for their checking account for 16 years. Consulting firm Accenture found that only 11 percent of people in North America said they tried to switch banks in 2015 or 2016. The rate was slightly higher for millennials — 19 percent — but still indicates a hesitancy to move.
The American Bankers Association, the trade group representing the industry, said customers recognize that banks are giving them more value by upgrading their systems to make banking safer and easier.
“Customers look for more than just interest on their deposits. They also value convenience, security and assurance their payments will be made,” said James Chessen, ABA’s chief economist. “When the Fed raises interest rates, all interest rates rise, but often at very different speeds depending on local market competition.”
The recent government shutdown, the longest in U.S. history, spotlighted how many Americans are living paycheck to paycheck and do not have much savings. The nation’s official savings rate is now 6 percent, meaning Americans save only $6 for every $100 they make.
The savings rate has been declining for years, which some economists attribute to years of stagnating wages for the middle class. The rate jumped after the Great Recession as people cut back on spending, but it is trending down again now.
With so little savings, Americans need to make the most of what they have, personal finance experts say.
“People are sloppy with their money. They are leaving a lot of potential interest earnings on the table by not looking for the best rate,” McBride said.