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Why Are Interest Rates So Low on Savings Accounts?

David Chang, ChFC®, CLU®
By: David Chang, ChFC®, CLU®

Our Banking Expert

Ashley Maready
Check IconFact Checked Ashley Maready
Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield

With high inflation and an increased cost of living, we all need a safe place to save money and earn interest. Savings accounts are popular options, but for the past few years, the interest rates on these accounts have been quite low. This has resulted in many people questioning why the rates are so low and what can be done to improve them.

The role of the Federal Reserve

Since March 2022, the Federal Reserve has undertaken a series of interest rate hikes, raising rates at 11 out of its last 12 meetings. This move comes as a response to combat inflation and brings interest rates to a level unseen since the housing market crash of 2007.

In total, the Federal Reserve has raised interest rates by 5.25%, marking this cycle of hikes as the fastest in history. Interest rates on savings accounts are fairly responsive to changes in the federal funds rate. Before the rate hikes, the average APY stood at a mere 0.06%. However, as a result of these recent rate increases, the current average APY for savings accounts has soared to 0.42%, a striking seven-fold growth compared to its previous level. This is a measly $42 for an annual $10,000 savings deposit.

While savings account rates have indeed increased, they are still trailing behind the pace set by the Federal Reserve as well as the hikes observed in other interest-based products such as mortgages, T-Bill rates, and credit card rates, which have experienced significant growth this year.

Mortgage lenders are currently charging rates close to 7%, almost double the rates before the Fed's hikes and a level not seen since the 2000 tech bubble. Credit cards are carrying an APR of 20.82%, the highest in history and 30% higher than the average credit card APR of 16.17% in March 2022, before the Fed began its rate increases.

While certain online-only banks and credit unions have adjusted their rates along with the Fed, despite the increase in interest rates, the interest rates offered by the majority of traditional banks are still comparably low.

This raises the question: Why is the average interest rate still low on savings accounts? Savings rates are influenced by a range of factors.

Here are the factors that impact savings rates and how you can find the best savings account for your needs.

Average national rates

As of Aug. 13, 2023, here are the national rates based on data available, which are the average of rates paid by all insured depository institutions and credit unions for the most common banking products.

Deposit Products National Deposit Rates (Aug. 13, 2023)
Savings 0.42%
Interest Checking 0.07%
Money Market 0.63%
1-month CD 0.20%
3-month CD 1.11%
6-month CD 1.30%
12-month CD 1.72%
24-month CD 1.47%
36-month CD 1.37%
48-month CD 1.30%
60-month CD 1.37%
Data source:

How banks make money

Out of the 94 different industries in the U.S., the banking industry is the most profitable, with a gross margin of nearly 100% and net profit of approximately 30%. The average among the other industries is about 36%. In fact, the total profit expected for 2023 for the commercial banking sector is $462.5 billion, almost double that of the second most profitable industry in the U.S.

One of the primary ways banks make money is by borrowing money from depositors at a certain interest rate and then lending that money out to borrowers at a higher interest rate. The bank makes a profit from the difference between the two interest rates.

For example, banks borrow from people who put money in a savings account at 0.42% and then lend out that money as a 30-year mortgage at 6.96%. This bank gets to keep the difference of 6.54%. This difference can be much higher for personal loans and credit cards.

In 2022, $2.75 trillion in mortgages were originated. Assuming a uniform mortgage lending rate of 6.96% and 0.42% paid to depositors, financial institutions raked in a staggering gross profit of almost $180 billion. The less they pay in interest, the more profit they can make, so it makes sense for them to keep rates as low as possible.

Personal savings rate

Currently, banks don't have to worry about competing for your money. Since the pandemic, the amount of cash that U.S. banks have on hand is at near record highs. With Americans throwing money into savings, banks have little incentive to raise the savings rate.

Prior to the pandemic, cash assets at commercial banks totaled $1.8 trillion. Cash assets increased to over $4.1 trillion in December 2021, more than double the total in February 2020. Cash assets have slipped down slightly to about $3.4 trillion since the height of the pandemic, but are still near all-time highs.

While banks are sitting on tons of cash due to the pandemic, there has been a big slowdown in lending. The loan-to-deposit ratio at U.S. banks fell drastically since the start of the pandemic and reached 58% in Q2 of 2021, the lowest level according to S&P Global Market Intelligence's database, which goes back to 2003.

It has grown since then and is currently hovering around 64%, but less than the pre-pandemic ratio of 72.4% in the fourth quarter of 2019. This means banks are sitting on more deposits than they ever have and many have little incentive to raise rates to attract capital.

Learn More: How to Calculate Interest Rate on Savings Accounts

Banks don't need your money

The banks will also adjust the savings rate based on the supply and demand of loans and deposits, as well as the policies of the Fed. If there is plenty of supply and people are saving a lot, then the banks will not need to pay out as much interest. If people are not saving as much and the banks need more money to lend out, then they will raise savings rates to attract more depositors.

When banks need your money, they will raise the savings rate to attract customers. Banks lose money when they pay out higher rates, so they keep them low in order to maximize their profits. Despite the largest increase in the federal funds rate in 20 years, banks have more money than they need, so they have continued to keep savings rates low.

Typically, high inflation leads to higher interest rates, which translate to higher savings rates as banks compete for more deposits. If banks want to decrease deposits, then they will lower interest rates. Many of the large banks currently have sufficient capital and are not actively seeking additional deposits. Until demand for loans picks up and banks see a need for more deposits, interest rates will continue to stay low.

How to find a better rate

Even though interest rates on savings accounts are low, it is important to shop around to find the best rates. In order to attract deposits, smaller financial institutions are offering their customers higher interest rates.

The primary reason why smaller banks can offer better returns is due to their smaller operations. Credit unions and online-only banks often offer higher rates because they don't have the substantial overhead costs associated with major brick-and-mortar banks.

Furthermore, there is no pressure to constantly impress shareholders.

An online high-yield savings account may offer higher rates, and credit unions may as well. CD and money market accounts may also offer higher rates than savings accounts. These could also be alternatives to look into for a better rate.

High-yield savings account comparison

We recommend comparing high-yield savings account options to ensure the account you're selecting is the best fit for you. To make your search easier, here's a short list of standout accounts.

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  • The banks will adjust the savings rate based on supply and demand as well as the policies of the Fed. The Fed's monetary policy and the government stimulus checks have dramatically increased the amount of money in the economy. During the pandemic, the U.S. personal savings rate reached an all-time high while bank loans decreased substantially. Due to the combination of these factors, banks have more money than they need and they do not need deposits, so they do not need to pay higher interest rates.

  • Some banks may be able to offer a higher interest rate. If you have a strong relationship with the bank and threaten to take your business elsewhere, you may have a better chance to negotiate a higher interest rate. It is also important to talk to the right person who has the authority to negotiate on the bank's behalf. To increase your odds, do research to find a similar product at another bank that offers better rates as leverage. It is important to compare products from a similar competitor and use a product that isn't promotional.

  • Do your research and look for banks that offer higher rates. Online-only banks and credit unions typically offer higher savings rates since they do not have to pay the same costs as brick-and-mortar banks. If you find a better rate, ask your bank and see if it can match or beat it. If not, consider switching to the other bank.

  • Many large banks have plenty of deposits and do not need to pay more interest for more deposits. However, the current landscape may be changing. Customers are withdrawing money from savings for daily expenses or seeking higher-earning investments. As a result, deposit rates may begin to increase. Ultimately, banks will need to enhance their competitiveness in deposit rates.

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