Banks are reducing the interest rates on savings accounts, causing a decline in the average rates of online savings accounts. Ally, American Express, Discover, and Marcus by Goldman Sachs have all made cuts to their rates, resulting in a decrease from 4.486% in January to 4.401% this month. Although the drop may appear insignificant, it is worth noting that it has occurred despite the Federal Reserve maintaining its benchmark rate since last summer. While market expectations suggest a rate cut later this year, it is not anticipated until September.
According to Ken Tumin, the founder and senior industry analyst at LendingTree’s DepositAccounts, it was expected that interest rates would remain stable until the possibility of a Fed rate cut approached. However, that does not seem to be the case at the moment.
Nathan Stovall, the director of Financial Institutions Research at S&P Global Intelligence, explains that bank rates are not solely influenced by federal funds rates. They are also determined by the bank’s funding requirements, which refers to how much deposits a bank needs.
Mark Hamrick, an economic analyst at Bankrate, suggests that the reason banks are reducing their savings rates is mainly due to their need for funding. Since the number of new mortgage originations is still at historic lows, banks may feel less inclined to attract deposits to balance out loans.
Banks are experiencing reduced profits on deposits, including certificates of deposits and money market accounts, as they face higher costs in the form of higher yield payouts. To improve returns, some banks are lowering interest rates for depositors.
According to Stovall, this is a normal practice in the banking industry and should not be seen as greed. Instead, it is a way for banks to gauge customer response to rate cuts and assess if customers will switch banks.
Historically, customers have shown loyalty to their banks, especially when it comes to savings accounts. Mark Hamrick, senior economic analyst at Bankrate, explains that savings accounts tend to have a high retention rate. Additionally, online savings rates remain relatively competitive, especially when compared to the average savings account, which only offers an annual percentage yield of 0.53%.
Pursuing the highest-yield savings account through rate chasing may have its disadvantages. According to Tumin, these high interest rates are often temporary promotions that disappear after a few months. This leaves savers with an unpleasant choice: either settle for a lower rate or go through the hassle of moving their money again.
In addition, savers should also take into account the overall financial stability of the institution where they plan to deposit their money. While deposits of $250,000 or less are insured by the Federal Deposit Insurance Corp at banks, it is still important to consider the institution’s financial health.
For those saving for the long term, it is wise to consider other factors as well. This includes fees, the convenience of electronically transferring funds to and from other accounts, and the quality of customer service provided by the institution.