Mike Stuckey is a classic “rate chaser,” moving money around every few months to earn better interest on his savings. Lately, that has meant parking cash in three-month CDs at a rather meager of 1% or so, then rolling them over, hoping rates sneak up a little more each time.
“It’s at least something on large balances and keeps you poised to catch the rising tide,” says the 60-year-old Seattle-area resident.
Rate chasers like Stuckey still don’t have much to chase, however. The Federal Reserve has raised its benchmark interest rates four times since December 2015, and banks have correspondingly increased the rates they charge some customers to borrow, but many still aren’t passing along the increases to savers.
Why? There’s an unlikely answer: Banking consumers are simply saving too much money. Banks are “flush” in cash, hidden away in savings accounts by risk-averse consumers, says Ken Tumin, co-founder of DepositAccounts.com. Bank of America announced in its latest quarterly earnings report its average deposits are up 9% in the past year, for example – despite the bank’s dismal rates.
“In that situation, there’s less of a need to raise deposit rates,” Tumin says. “In the last couple of years, we are seeing deposits grow faster than loans.”
Banks don’t give away something for nothing, of course. They only raise rates when they need to attract more cash so they can lend more cash.
As a result, savings rates remain stubbornly slow to rise. How slow? Average rates “jumped” from 0.184% in June to 0.185% in July, according to DepositAccounts.com. (Disclosure: DepositAccounts.com is a subsidiary of LendingTree Inc., which is also the parent company of MagnifyMoney.com.)
And while the average yield on CD rates is the highest it’s been in five years, no one is getting rich off of them. Average one-year CD rates have “soared” from 0.482% in April 2016 to 0.567% in July. Locking up money long term doesn’t help much either – five-year CD rates are up from 1.392% to 1.504%.
There’s another reason savings and CD rates remain low, something economists call asynchronous price adjustment. That’s a fancy way of saying that companies are more price-sensitive than consumers.
It’s why gas stations are quicker to raise prices than lower prices as the price of oil goes up or down. Same for airline tickets. Consumers eventually catch on, but it takes them longer. So for now, banks are enjoying a little extra profit as they raise the cost of lending but keep their cost of cash relatively flat.
Holding Out for 2%
There have been some breakouts, however, most notably among internet-only banks. They have traditionally offered higher rates than classic brick-and-mortar banks, and now, they are more sensitive to rate changes, Tumin says. Goldman Sachs Bank USA, the Wall Street firm’s push into retail banking, announced in June it would offer 1.2% interest to savings depositors. The bank is working hard to attract new customers. Soon after, Ally Bank announced higher rates at 1.15%.
“Internet banks are always more sensitive to changes in the economy and at the Fed. Also, internet bank account holders tend to be more rate sensitive,” Tumin says.
“I remember in 2005-2006 we were seeing a 25 or 50 basis point upward movement,” says Tumin. Now we are looking at a 5 or 10 basis point improvement.” He expects that trend – stingy rate increases – to continue for the foreseeable future.
When will more consumers sit up and notice higher savings rates – and perhaps start pulling cash out of big banks, putting pressure on them to join the party?
“I think 2% will be a big milestone,” Tumin says. “That will be a big change we haven’t seen in five years.”
If you’re really frustrated by low rates from traditional savings accounts and CDs, Tumin recommends considering high-yield checking accounts, a relatively new creation. These accounts can earn consumers up to 4%-5% on a limited balance – perhaps on the first $25,000 deposited. The accounts come with strings attached, however, such as a minimum number of debit card transactions each month.
“If you don’t mind a little extra work … you are rewarded nicely,” Tumin says.
Time to Ditch Your Savings Account?
For that kind of change, is rate chasing worth it?
For perspective, a 0.1% interest rate increase (10 basis points) on $10,000 is worth only about $10 annually.
It’s, of course, up to consumers whether or not the promise of a little more cash in their savings accounts is worth the effort of closing one account and opening another.
Stuckey says rate chasing doesn’t have to be hard.
“I don’t really find it anything to manage at all,” he says. “(My CDs) are in a Schwab IRA, so I have access to hundreds of choices. They mature at various times, and Schwab always sends a notice, so I just buy another one.”
The low-rate environment has impacted Stuckey’s retirement planning, but he’s philosophical about it.
“I have mixed feelings. In 2008, as I planned to retire, I was getting 5.5% and more in money market accounts. High-quality bonds paid 6 and 7%. So lower rates have had an effect on my finances,” Stuckey says. “But … it has been nice to see young people able to afford nice homes because of the low rates. My first mortgage started at 10.5%.”
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