Late in 2018, online savings accounts were paying a healthy interest and at very little risk. The Federal Funds rate stood at between 2.25% and 2.50% and most savings accounts paid out interest above 2.20% APY.
But when the Fed (Federal Reserve) started a policy of slashing rates during the winter of 2018 – and continued those cuts as the coronavirus took hold – the Fed weet into emergency mode and slashed rates down to zero. With that measure, the days of excellent interest rates for savings accounts essentially evaporated.
With the news that the Fed plans to keep interest rates in the near-zero range until 2023, banks reacted accordingly.
As of today, the major players in banking lay out just 0.6% in interest for savings accounts and some, like Ally Bank, pays just 0.80% annually.
But the Fed rate policy alone isn’t the sole reason savings accounts don’t pay out the way they once did.
It comes down largely to the fact that a bank’s deposit rate is reflected by its willingness to land additional deposits and depositors.
When the Banks Don’t Want – Or Need – Your Money
A banks’ demand for money is driven by market conditions. As customers have begun to place their funds in savings accounts and fled from the volatility and risk inherent in the stock market, the money flows in accordingly.
Investors – intent on playing it safe – have stacked up trillions as they await the outcome of the looming election.
Your Online Savings Account Interest Rate May Have Tanked – But Some Tanked Harder
When the demand for capital to fund loan requests is high, banks are suddenly faced with a need to gather funds in the form of deposits – and they often pay a premium to depositors to make it happen.
Banks flush with deposit accounts can lend those funds out – profitably – and that’s the case in this market. Those loan pressures and demand exert downward forces on the rates they pay depositor in the form of interest rates.
The most attractive savings accounts at the moment are offered by Citi. They’re paying out 0.90% in interest at the moment.
What all this means is that it makes sense to shop rates or transfer your cash reserves to banks which offer the most lucrative returns.