While the Federal Reserve has increased its policy rate from the zero lower bound to 4.5 percent since 2022, the average saver is not seeing a corresponding jump in the interest on their savings account.
Unfortunately, it's surprisingly difficult to find data on savings account rates before the FDIC started reporting them in 2009. An article from CNN Money from October 1999 indicates that this has been an ongoing trend for quite some time.
"Bankrate.com's semi-annual survey of 10 major markets nationwide finds that yields on passbook accounts hover at a decade-low 1.67 percent…
The October 1999 average mark the latest slip in the ongoing erosion of savings interest over the past 10 years. Savings rates began the decade at 5.2 percent, declined to 2.35 percent by mid-decade, and fell below 2 percent for the first time ever this year."
The delta between the average deposit rate and Fed Funds fluctuated between 2.7 and 3.5 percent. In 2023, that gap is even larger at 4.2 percent.
At the time, Banking Professor Bob McGoffin told CNN that savings account rates remain low because the people using them are extremely rate insensitive:
"People do not put money in a savings account for the interest rates; they put money in savings accounts because they want to separate their funds but they want to have daily access. Savings are nothing more than a place to set it aside."
In economics terms, their demand is extremely inelastic: the demand to hold savings deposits doesn’t change much given a change in the price of savings deposits (the interest rate). 24 years later and this explanation still checks out. If persistently low savings rates pushed depositors to move their money out of savings accounts and into higher yielding vehicles (of which there are several) then banks would be forced to raise their rates to prevent a loss of core funding. Since depositors do not do that to an extent large enough to hurt banks, the banks have no market pressure to increase their rates with Fed Funds.
Savers have to be a bit more proactive in reaping the benefits of higher interest rates. With short term interest rates higher than they've been in 15 years, savers can capture that by moving their balances into a money market mutual fund, buying 12 month certificates of deposit from their bank, or buying Treasury bills. I personally favor the last option the least, as Uncle Sam has a tendency to do heinous and immoral things with the money we lend him.
Are savers too inelastic? Back in the 90s, economist Keith Leggett told CNN: "Over the last couple years, we've had a really benign inflation environment. Inflation over the last year was running at 1.7 percent. What's really going to determine the interest rate is the inflation picture. If inflation picks up, we will see the interest on savings accounts also pick up." In 1999 the average savings deposit rate was high enough for savers to break even with inflation. Must be nice, right?
Unfortunately, savings account demand seems to be so inelastic that it doesn't budge with high inflation. People who started saving in the 2010s have never known a savings interest rate that beats the rate of increase in the consumer price index, even with the inflation rate from 2010 to 2020 averaging around 1.5 percent. In 2022 and 2023, we've seen some of the most negative real deposit rates in history.
The real interest rate is the printed interest rate minus the current inflation rate. With savings interest of around 0.37 percent, and the latest year over year inflation print of 6 percent, real deposit rates are averaging negative 5.63 percent. Money Market funds and short term securities only allow savers to lose less, offering a 1.5 percent loss instead of 5.63.