- [Narrator] The Federal Reserve
keeps raising interest rates to fight inflation.
Today, it's at nearly 4%.
- And we continue to anticipate
that ongoing increases will be appropriate.
- [Narrator] But what about the interest rates
that make you money like on your savings account?
Right now, the average savings account pays
less than a quarter of a percent
but some savings accounts are going
up just as fast as the Fed's.
- You know a lot of what you experience
with what's happened with savings rates
really depends on where you're looking.
- [Narrator] Here's why most savings accounts are lagging
behind the Fed's rising rates and which ones aren't.
Let's start with why a bank
pays you interest in the first place.
It's because, well, they need your money.
Banks use the deposits people keep with them
to fund loans like for cars or credit cards
and they profit off of that interest.
Basically, they need these deposits in order to make money,
which is why they entice you with savings rates.
- The savings rate that a particular bank is paying
is a reflection of their desire for additional deposits
or their attempt to retain the deposits that they have.
That's it.
- [Narrator] Greg McBride works at Bankrate
which compiles this data on savings accounts.
- We survey financial institutions
for rate and fee information
on a wide range of consumer banking products
- [Narrator] And there is a wide range
all in competition to keep your money.
A traditional savings account
with your regular bank isn't the only safe place.
There's also online savings accounts, which traditionally,
pay more interest than your local brick and mortar bank.
Then there's CDs or certificates of deposits.
Basically, the bank will pay more in interest,
but only if you keep that money with them
for a set amount of time.
It's similar to a government treasury bond.
You earn more interest, but your money is tied up
not readily accessible like these savings accounts.
But with all these choices, if the rate rises on one,
it usually pressures the others to rise too, usually.
- If banks want to retain deposits,
they've gotta keep pace with
what government bonds are yielding.
Otherwise, savers will take their money
out of the bank and put it in government bonds.
- [Narrator] Those government bonds
are yielding high Interest Rates though.
They are keeping up with the fed's rising rates.
So, why aren't these savings accounts?
The answer lies in this chart.
The amount of money currently held as deposits at banks.
You can see this huge spike here in 2020,
where people stopped spending,
started saving and received stimulus checks.
The banks were flush with deposits and they still are.
Experts like Greg say not only do big banks
not need to attract deposits,
but also see rising rates as an opportunity.
- Well interest Rates were at record lows for years.
And so, what happened was
that squeezed bank interest margins.
- [Narrator] Banks don't wanna pay more in interest
than they're bringing in, right.
For a long time, even before the pandemic,
the Feds kept interest rates low
meaning the rate they profited from
like car loans was also low.
Now that the fed's rate is going up,
meaning these rates are too,
they're not going to increase the savings rate
unless they really have to.
And overall banks have so many deposits right now,
they don't.
- A lot of the bigger banks in particular
they're sitting on a mountain of deposits.
They have more deposits than they know what to do with.
So the last thing they're gonna do
is raise cost of that.
- [Narrator] So who is paying a competitive rate?
Online accounts,
often called high yield savings accounts
are offering savings rates as high as 3.5%.
- Banks that are eager for deposits,
that have a growing loan operation
and need to feed that machine by bringing in more deposits,
they will pay increasingly competitive rates.
- These types of accounts
are still FDIC protected like any bank.
You just have to transfer money in and out of them online,
which could take a few days
as opposed to being able to make
a same day withdrawal in person.
- If you're not taking any risk,
would you rather earn 3 1/2% or would you rather earn 0.01%?
I mean, that's a slam dunk. That's easy.
- [Narrator] So why isn't your savings account
going up with the Fed's rising rates?
It could be because you have your money in the wrong place.
(cheerful music)