Why Interest Rates on Savings Accounts Are Still So Low

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, do you know what the average interest rate paid on US bank accounts currently is?

Joe Weisenthal (0:20)

Only because we just looked it up, and I couldn't believe it. I actually thought you were wrong about a decimal. I thought when you told me the number that you must be a decimal point off.

Tracy Alloway (0:30)

Yeah, it is surprising. So the average annual percentage yield, or APY according to bank rate, is 0.23%.

This at a time when, as you know, benchmark interest rates are at like 4.5%, 4.75%.

Joe Weisenthal (0:48)

I would have guessed that maybe they were like 1.5%, 2%, which is still pretty low, right? So if you could get 4.5% as a bank, an overnight rate, and then it's like, okay, maybe you're saving your depositors, checking account, whatever, get a couple percent, that's still a spread, but they're still basically paying you nothing if you just want to hold your cash there, which is pretty staggering.

Tracy Alloway (1:10)

Absolutely. So this is a question that comes up a lot, and it's obviously frustrating if you are a saver.

Everyone wants to be a rentier to some extent, right? We all want to make money on our money. Exactly, that is the dream. So if the banks aren't passing through those interest rate hikes, it's naturally frustrating for retail depositors. However, it's also kind of frustrating from an economic slash macroeconomic policy perspective, because if you think about what monetary policy is supposed to do, it is supposed to work through changes in interest rates, which are supposed to ripple out from the central bank into the rest of the economy.

Joe Weisenthal (1:50)

Right, intuitively, like one channel that you could imagine that rate hikes work through is, oh, look, suddenly I'm getting a lot more money to save or getting more, maybe at the margin, I'll save a little more because I'm getting paid to spend a little less, sort of decrease pressure in the economy. I don't know if anyone ever really thinks that way. It's like, oh, I'm not going to buy this watch, or I'm not going to buy these concert tickets because I could get 3% having left this money in the bank.

Nonetheless...

Tracy Alloway (2:21)

We can get 0.23%.

Joe Weisenthal (2:23)

Yeah, I'm definitely going to keep spending in that case. And of course, there are ways to get more yield and you can lock it up. And if you wanted to, you could go out and buy a one-year...

Tracy Alloway (2:34)

Certificate of deposit.

Joe Weisenthal (2:35)

I'm not going to do that, you know?

Tracy Alloway (2:37)

You're not? Okay.

Joe Weisenthal (2:38)

It's so much work.

Tracy Alloway (2:39)

Okay, well, this is clearly something that we need to talk about, both in the context of monetary policy and broader economics. And I am very pleased to say that we really do have the perfect guest on this topic. We're going to be speaking with Joe Abate.

He is a money market strategist over at Barclays, also does fixed income research. I've been a fan of his work for a very long time and have been meaning to get him on Odd Lots for just as long. So I'm very pleased to have him here now to explain this discrepancy to us. Joe, welcome to the show.

Joe Abate (3:10)

Thank you. Nice to hear.

Joe Weisenthal (3:11)

Are those numbers right?

Joe Abate (3:15)

Yes and no. I think the fundamental problem with bank deposit rates is that there's so many different types of deposits.

And because there's so many types of deposits, it's hard to kind of come up with one comparable interest rate across all banks and across all forms. So you have deposits, time deposits, for example, CDs that you just mentioned. You've got checking account rates, if they pay interest at all. And then you've got different balance requirements for different types of customers and things like that. So coming up with an explicit one size fits all, bank deposit rate, is difficult.

But the phenomena that you're describing, where bank deposit rates in a rising rate environment go up like a feather and in a interest rate cutting environment where the Fed is easing policy, they sink like a stone, that's been a phenomena for decades.

Tracy Alloway (4:18)

Well, let's get into that then. So, you know, the Fed hikes rates on a Wednesday.

Why doesn't that just automatically translate to a bunch of banks emailing savers and saying your deposit rate is going up? And I know there are a couple that do seem to automatically raise saving rates, but it's not the norm.