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
Hey, it’s all about supply and demand. Banks can get cheaper funding elsewhere, so they don’t need to offer high rates to attract deposits.
CD rates from many banks from brokerage accounts still can be had around 4% for terms as short as a year or so.
You were a child during a high inflation era (the late 1970s) and during that period the [Federal Reserve used an extremely high interest rate regime](https://fred.stlouisfed.org/graph/?g=1hdd4) to get inflation back under control.
Today the 4 very large banks don’t need to offer competitive interest rates to attract deposits instead they compete on their Too Big to Fail status and national footprint of branches and ATMs. If you want competitive rates you need to take your savings to a smaller less convenient bank, however the Fed uses tools beyond pure interest rates to manage inflation so market rates are not as high as when you were a kid.
Mortgages remain high relative to other interest rates because the government has incentivized many firms to leave originating mortgages and the spreads between mortgage and treasury rates are much wider than when you were a child.
You are not required to put your money into a savings account at a bank. If you want higher rates, you can get them elsewhere. If enough people actually do this, and banks want cash in savings accounts, they will have to raise their interest rates.
Bluntly, I’m not sure banks care all that much if you leave a few hundred or thousand bucks in a savings account (and if you’re putting hundreds of thousands or millions into a standard savings account, that’s a whole different problem). Maintaining these accounts is pretty much just a cost to them – having to keep track of all the accounts and all the potential things that could go wrong. And for what? So they have that money to use as part of their reserves? They can get cheap and plentiful money elsewhere, so they’re not chasing you for yours. Besides, they’d much rather you put that cash into things that earn them commissions and fees day in and day out – savings accounts just don’t do that. In short, the banks are somewhere between indifferent and discouraging when it comes to small savings accounts, and the interest they pay reflects that. Don’t like it? Invest/save another way.
There are higher-interest accounts out there. My savings account has an interest rate of 4.35%
Shop around. If you have more than a few thousand in savings, it is worth moving banks. There are HYSAs with over 4%. CDs at some of these banks are paying over 5% for some terms.
The rates do exist, just maybe not at the very largest banks since they already have a lot of peoples’ money.
Capital one has a savings account with a 4.2% interest rate or something like that. They are out there.
Cash rates are around 5%. Not sure where you are looking but most money market funds are in that range. Hysa maybe a little lower. Mileage with CDs will very depending on the lock up. The longer you go out the lower the rate because the yield curve is inverted, I.e. the expectation is rates will be lower in the future. It all comes back to the fed funds rate and expectations. Deposit beta has also been lower this cycle, but that’s another conversation.
The simple answer is that most people don’t shop around. If you’re one of the 5 or so big banks and no one is leaving over the 0.01% interest rate you’re paying, why offer more?
Be a smarter consumer than the banks give you credit for. Wealthfront Cash is paying 5.0% right now and there are [lots of other banks](https://www.nerdwallet.com/m/banking/standout-online-savings-accounts-2) offering 4.5% or better.
Many do have decent rates. Like Ally you can get 5% with. Been using them for years. Some offer better.
Reason ones like Chase/BOA/Wells don’t is because they know it won’t make a difference to their customer base. They are like fast food places, people don’t go because of the great product.
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