Low Savings Rates Discussed at House Finance Hearing

Low savings rates were one of the topics at a House Finance hearing this week. It's nice to hear a Congressman complain to the Fed Chairman about low savings account rates.

In a hearing for the Semi-Annual Monetary Policy Report to the Congress, the House Financial Service Committee Chairman, Jeb Hensarling stated, "...the Fed is currently paying 150 basis points yet our constituents typically receive about 10 basis points on their savings account." 

Powell's response was "...retail deposits are sticky on the way up as you know, and they generally come up with a lag.

You can view the exchange on savings rates between the Fed Chairman and Congressman in this short clip provided by CSPAN.

Hensarling saying constituents are getting 10 basis points on a savings account is generous. The FDIC's current average rate is actually 0.07 percent. Savings rates offered by some large banks are much lower. Three large national banks are currently offering a staggering 0.01 percent on savings accounts.

Opening a savings account at a large bank is rarely advisable due to their low rates. Online banks currently offer online savings rates much higher than the average rate.

The Federal Reserve's low interest rate policy of near zero percent for seven years decimated deposit rates. As a result, depositors who relied on interest income from deposits saw their income plummet the past decade.

On December 16, 2008, the Fed lowered the fed funds rate 100 basis points to near zero percent. The rate stayed at near zero percent for seven years until December 17, 2015, when the Fed increased the rate 25 basis points. During the same time, the best 1 year CD rates plummeted from around 5.00 percent to under 1.00 percent.

You can view a history of the fed funds rate changes here.

Low Savings Rates Finally Move Higher

Banks finally started increasing interest rates over a year ago but rates are still historically low.

The FDIC Average National Savings Rate is currently at 0.07 percent. The highest online savings rate is much higher at around 1.60 percent. The FDIC's National Average 12 Month CD rate is currently at 0.32 percent. The best 1 year CD rate is also much higher around 2.10 percent.

Banks are expected to continue to increase deposit rates since the Fed is expected increase the fed funds rate. There may be as many as four rate hikes in 2018. Each rate hike is typically 25 basis points, or 0.25 percent. Four hikes will send deposit rates up another 100 basis points, or 1.00 percent.