Your California bank account interest rates may rise — but not as fast as Fed hike. Here’s why
Try buying a car or a house and you’ll find loan interest rates are higher than they’ve been in years.
So why aren’t you even earning 1% interest on your savings or checking account?
Chances are that most major online banks won’t hit that level on savings accounts until the end of next month, with 2% routinely in sight only by the end of the year, said Ken Tumin, founder of DepositAccounts.com, which tracks and compares bank rates.
In the Sacramento area, a majority of banks and credit unions offer 0.01% to 0.75% annual percentage yield, according to Deposit Accounts. There are better deals with certificates of deposit. Citibank, for instance, offers California residents a 1.5% rate on an 11-month CD.
But rates just aren’t going to soar anytime soon. Financial institutions follow the Federal Reserve, and even as it’s raising rates, its target federal funds rate still is only in a range of .75 to 1%.
“The Fed rate increases have not been significant and we are still coming off a historically low-rate level to combat the pandemic and business shutdowns,” said Stephen Andrews, president and CEO of the Western Bankers, in an email to The Bee. Western Bankers is a banking trade association that serves western U.S. states including California.
Andrews added that there’s a lack of demand for loans, due to stimulus dollars still on bank balance sheets and with potential borrowers worried about the lingering pandemic, societal tension and war in Ukraine.
“As a result, banks have less flexibility to raise savings rates as loan demand slows,” he said.
The rate is used by banks that borrow and lend excess reserves to each other overnight. It’s the Fed’s major tool for trying to expand or restrict economic growth.
With inflation roaring at its steepest levels in 40 years, the Fed is expected to impose as many as five more rate increases this year. Its action is spilling into the consumer market; rates for a 30-year mortgage have spiked to an average of about 5.25%.
Based on history, there could be a few more Fed increases “before we see widespread and significant gains in online savings account rates,” Tumin said.
The brighter news is that “savings rates are going up, if you look in the right place. Smaller banks and online banks that are eager for more deposits have been raising their payouts and this will gain further momentum as the Federal Reserve raises interest rates,” said Greg McBride, chief financial analyst at Bankrate.com.
The Fed began raising key interest rates in March. It raised rates again this month and more increases are expected in June, July and this fall. It’s aiming to calm the huge post-pandemic demand for goods and services, which should slow price increases.
That’s particularly good news for banks, which are trying to recover from last year, when the difference between what they earned on loans and what they paid for their own funding was at a record low.
As a result, McBride said, “loan rates will go up more than deposit rates so banks can see some recovery in their margins.”
There’s another reason consumer savings rates are likely to go up slowly. Many banks are holding deposits and must lend the money before they try to attract more.
Their situation is “much like a business with two warehouses full of merchandise won’t order more until they sell what they have on hand,” McBride said.
Consumers can often fare better using online banks, the data show. Such banks don’t have the same branch office and brick and mortar expenses.
“Online banks have a history of moving faster as rates rise. Not only do they move faster with their deposit rates, but their deposit rates move up much higher,” said Tumin.
If the Fed keeps raising rates as it has signaled, Tumin predicted that consumer rates by the end of 2022 will be similar to what they were at the end of 2018, after the Fed spent three years increasing rates.
“If online savings account rates track the federal funds rate as they did in 2018, online savings account rates should be close to the federal funds rate,” he said. Depending on what the Fed does, that could mean rates of anywhere from 1.5% to 3.5% by the end of next year.
McBride saw another advantage.
“For money you could need at a moment’s notice, such as your emergency savings, put this in an online savings account where you can benefit from rising interest rates but have access to the money whenever needed and the protection of federal deposit insurance,” he said.
But don’t count on bank interest rates for a big windfall.
“For longer term goals like retirement, you’ll need to invest more aggressively, with a heavy weighting toward stocks in order to get the growth needed,” he said.
This story was originally published May 26, 2022 at 5:00 AM.
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