Why interest rates are rising on your loans, but not for your savings account. : The Indicator from Planet Money When the Fed hikes interest rates, the interest rate on your savings account usually follows in step. But recently, that logic hasn't held up. We ask an economist and a community banker why.

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Interest rates up, but not on your savings account

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And I'm Adrian Ma. We've been watching the Federal Reserve raise interest rates pretty aggressively for most of this year. And tweaking interest rates is one of the main policy tools the Fed has. And when it uses this tool, there are effects that ripple throughout the economy.

WONG: For example, rates on credit cards have gone up. They're at 20%. Mortgage rates have shot up, too. They're over 6%.

MA: And then there are the interest rates that we get on our savings accounts. You know, for parking your money there, you get a little something-something. Today, the average national rate is 0.3%, which - now, I guess, that I'm saying it - is basically nothing.

WONG: The sad trombone of rates.

MA: Not something-something, more like nothing-nothing.

WONG: More like wah, wah (ph).


WONG: Right now, consumers are paying more interest when they borrow money, but they're not earning more interest on their savings accounts. And these stubbornly low interest rates have even caught the attention of lawmakers, like Michael San Nicolas of Guam. He asked Wall Street bank CEOs about it at a congressional hearing in September.


MICHAEL SAN NICOLAS: One of the only silver linings in a rising interest rate environment is that savers are supposed to be rewarded for their savings. They're supposed to see the interest that they earn on their savings accounts go up.

MA: Yeah. What gives? Today on the show, we get out our magnifying glasses and zoom in on these paltry interest rates to find out why they have stayed so low.


WONG: Before we get to what's going on with savings deposit rates, it's helpful to step back and think about what a bank actually does.

MA: You mean besides, like, handing out cheap calculators and lollipops?

WONG: Yes. Well, supplying the nation's children with lollipops is a vital function of banks. But what they're also doing is moving money around. They're taking in money from depositors - that's people like you and me with savings and checking accounts. Then they're taking those deposits and lending them out in the form of mortgages and small-business loans. They even lend money to other banks.

MA: All of these activities come with interest rates that are set by the banks. So the banks, for instance, will decide how much to charge borrowers on different kinds of loans, and they also decide how much interest they will pay on people's savings accounts - you know, how much they will reward savers for stashing their money in the bank's vault.

WONG: And when banks set or adjust their rates, they're following the lead of the Federal Reserve. The Fed has a benchmark range for interest rates. So when we talk about the Fed hiking rates, as they're doing now, we're talking about this benchmark range moving higher.

MA: Matthew Plosser is a research economist at the New York Fed, and he says it is important to study how the Fed's actions on interest rates affect the way banks behave.

MATTHEW PLOSSER: We like to understand, when we change interest rates, how do these interest rates migrate through the financial system and change the cost of other things?

WONG: Other things like savings deposit rates. And last month, Matthew and a fellow researcher at the New York Fed published a blog post looking at these rates over the last 30 years. This period of time covers four cycles of Fed interest rate hikes, including the cycle we're in now.

PLOSSER: So for a long time, we've known that when the Fed raises interest rates, deposit rates don't go up immediately. That's always been the case. But since the financial crisis, they've responded even more slowly than they had before.

MA: In other words, deposit rates have gotten really sluggish. Like, they barely budge even when the Fed hikes rates and sends interest rates across the country higher. And the way Matthew measures this is using something called - are you ready for this econ vocab? It's called deposit beta.

PLOSSER: It's a fancy way of just saying, how much do deposit rates change when interest rates change?

MA: It also sounds like it could be the name of some sort of, like, dubious multivitamin.

WONG: (Laughter).

MA: Have you had your deposit beta today?

WONG: Now, Matthew found that deposit betas hit a high point before the financial crisis in the early 2000s. During this period, a large percentage of a Fed rate hike was passed through to deposit rates.

MA: So for example, if the Fed raised interest rates, say, four percentage points, you would see deposit rates go up more than two percentage points. But that started to change following the financial crisis. Matthew says people started saving more, and as a result, banks were swimming in deposits. They didn't have to offer high interest rates on savings deposit accounts anymore.

WONG: And by 2019, deposit betas had fallen significantly. So if the Fed raised interest rates four percentage points, deposit rates would go up just over one percentage point. Banks just didn't need those savings to fund their loans and other investments.

PLOSSER: They have plenty of deposits, and they weren't in a rush to start paying more on these deposits. They didn't even need the deposits they had. They were comfortable allowing depositors to go find better deals rather than pay them more for deposits they don't really need.

MA: This increase in deposits became really pronounced during the early part of the pandemic. You remember. That was when Americans were getting stimulus checks and unemployment insurance and child tax credit payments. And in a lot of cases, the money was deposited electronically, right into people's accounts, accounts at places like Abacus Federal Savings Bank in New York City. Jill Sung is the CEO and president there.

JILL SUNG: During the pandemic, all banks, like us, experienced what we call surge deposits - surge meaning that there was a tremendous amount of deposits coming in all at once.

WONG: Jill's father opened Abacus Federal Savings Bank in Manhattan's Chinatown in 1984. Today, they have locations in Queens, Brooklyn, Philadelphia's Chinatown and New Jersey.

SUNG: We are very loan focused, and our whole mission is about giving credit to what has been traditionally - for lack of a better word, credit that has not been given out to our community. So we're very focused on credit, and we're very focused on residential lending in particular.

MA: And at Jill's bank, a group of executives meets regularly to look at what rates they're offering on their deposits and loans and make adjustments if they need to.

SUNG: It is very manual, and there is sort of an art to it. When I first started, I was like, oh, my God. Like, what do you do? What do you look at? There's a policy we follow. We have to look at the Fed rates. We have to look at our competitor rates. We have to do all...

WONG: And because the Fed has been moving so aggressively on its rate hikes, this group has been meeting almost weekly.

SUNG: So we say, OK, what do we see our customers wanting in terms of home lending and loans? And then if that need is great, we will also look to see how much deposits we're bringing in so that we can basically feed that need. We don't balloon up our deposit base over what our customer, our community needs in terms of loans.

WONG: And it's by reviewing these numbers on a regular basis that helps Jill decide, OK, we've got enough deposits where we don't have to offer a higher rate on savings accounts. So if an old lady walks up to the counter and waves her pocketbook at the teller and says, give me a high rate, or I'll take my money to the other bank in town, Jill can say, sorry, no deal.

MA: (Laughter) Oh, that's so cold.

WONG: Well, you know, Jill says this character, this little old lady who's shopping around for a higher rate, she's kind of an urban legend among community bankers. But there is a kernel of truth to this stereotype.

SUNG: I actually have seen that. They'll come to me and say, oh, that bank across the street is offering this rate. Do you want to match? And I'm like, well, right now we can't. And then they'll pull out. They'll leave.

MA: And because banks have this excess supply of deposits, they could let those customers go to a competitor. But that is starting to shift. People are taking their money out of savings to pay for everyday expenses, or they're moving their money to higher-earning investments. Matthew Plosser at the New York Fed says with these changes taking place, deposit rates could start to perk up.

PLOSSER: At some point, banks will say, we're going to have to be more competitive with our deposit rates. The forces are all moving in the direction of deposit rates eventually going up. It just takes time for that to resolve itself.

WONG: Maybe banks will get more competitive with their freebies, too. What are you in the market for, Adrian?

MA: Ooh, what freebies do I want? You know, some pens, some stress-relief balls, a frisbee, a mug, a cap. I don't know. I also - I wouldn't mind just taking cash.

WONG: (Laughter).

MA: That would work for me.


WONG: This episode was produced by Corey Bridges with engineering from Maggie Luthar. Sierra Juarez checked the facts. Viet Le's our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.


WONG: Should we add a disclosure that we are not a personal finance show? (Laughter).

MA: I think that's implied by everything we have said so far.

WONG: (Laughter) This is one of those retire-by-40 shows.


MA: Sorry. Was that...

WONG: Like, just wait for your bank to offer half a percent on your savings account?

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