why can’t the major banks offer decent CD interest rates anymore? Or savings accounts with compound interest over a fraction of a percentage?

Question

51M. As a child I had a children’s saving account with compound interest. My $100 went up to just below $200 in around 4 – 5 years. That seems like peanuts, but to a kid that was a lot.As a young adult, in the mid 1990s, I remember my older colleagues were talking seriously about CD interest rates to put away for up to five years, at 6%.

Now, in 2024, with the major banks, a one-year CD from Bank of America is 0.03%. Maximum rates for 5 years is 2.5% at Chase, no matter how much money you put away. Savings accounts compound interest rates are 0.01%, max, IF you maintain at least $10,000 in the account.Yet interest rates for a housing loan are at 7% and putting housing purchases out of reach. How can the banks do this?

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In: Economics

Answer 1

I am happy to educate you good sir/madam!

The biggest banks received fucktons of deposits after the recent banking crisis blip when there was a run on community banks, deposits moved to the more “secure” large banks. As a result, they don’t need your money that badly so they will happily pay you pennies on the dollar compared to many smaller banks today. You are also looking at the wrong places for good yields, but I’ll get more into that below.

Also, as for how much interest they charge, that’s the result of the Federal Reserve raising interest rates. Banks need to be able to borrow money in order to fund their loans, the Fed acts as a lender of last resort, so when they raise the cost of funds, it becomes more expensive for banks to fund loans, so they have to charge more. The market will bear a higher interest rate as the Fed raises rates, and a lower one as the Fed lowers rates. That’s how monetary policy and “tightening” works to control inflation. If the Fed raises interest rates then banks have to charge more for loans which means people borrow less money which means they can’t buy as much stuff and the total amount of money in the supply goes down which means the economy cools off and each dollar is worth more Aka inflation goes down.

Now for more useful detail for you:

I have a CD over 5% for 8 months. My savings account gets over 4% yield. Those are EagleBank and Capital One respectively.

You need to look at High Yield Savings (HYS) accounts and better CD options. Many regional and community banks have these options.