U.S. consumers have begun to feel reverberations from the Federal Reserve’s interest rate hike earlier this month in some areas of their lives, but not in others. Unfortunately for those consumers, it’s all the wrong places — their savings accounts haven’t budged.
Mortgage rates jumped immediately from 4.16% to around 4.5%, and are now ticking up close to 5%. This sent the number of applications down 8.1% the following week, according to the Mortgage Bankers Association. The average mortgage payment is up 8.3%. Similarly, credit card holders with balances are bracing for bigger bills.
For savings accounts, however, Bankrate’s Greg McBride doesn’t see any trickle-down effect from the Fed anytime soon: For that to happen, the Fed needs to hike rates again when it meets on May 3 and then possibly again when it meets roughly six weeks later.
The long-awaited hike, meant to cool the economy amid sky-high inflation, brought the rate from 0-0.25% to 0.25% to 0.50% — a 25 basis point increase.
“By the time we get the second and third rate hikes, especially if either or both amount to larger 50 basis point hikes, we’ll see some upward momentum on high-yield savings accounts,” McBride told Yahoo Finance.
The recent hike comes after a long period of low interest rates. The Fed cut rates to near zero (0 to 0.25%) from December 2008 to December 2015 to boost the economy after the financial crisis. Rates gradually rose to around 2% in 2018. After a small cut in the fall of 2019, the Fed slashed rates to zero once again to combat massive unemployment during the coronavirus pandemic. But now, due to high inflation and a strong job market, the Fed has been finally raising rates.
An Ally Bank spokesperson told Yahoo Finance that it didn’t have a specific date in mind for a hike, noting that it is constantly assessing market conditions, the Fed's moves, general economic health, competitors' rates, and its own financial and capital needs.
Fed cuts have immediate effects, hikes not so much
Savings account interest rates are highly sensitive to interest rate cuts, but less so to hikes. Even a whiff of an interest rate cut in the past has been enough for a bank to lower rates, but historically they have been slower to raise them after hikes.
When the Fed lowers rates, banks cut savings account interest rates, passing on their costs to depositors. Banks hike rates, however, not to pass along their profits to depositors, but rather to attract more deposits when they need them. If a bank has enough deposits after a hike, it may not feel pressure to raise its savings accounts’ rates.
Banks also have other products that reflect Fed changes more quickly.
“Yields on certificates of deposit are perking up a bit and that’s where we see yields moving first,” McBride said. “Banks typically boost yields on time deposits like CDs and the liquid accounts like savings accounts and money markets follow.”
Before the pandemic, online savings accounts, which were much more subject to changes in the Fed, used high rates to attract deposits. At the time, rates of 1.75% or even up to 2.25% were not unusual for Ally, American Express, CIT, Marcus, and others, far above the average for that time, which was just 0.09%
When we might see that again is a big question. When rates were as low as they are now in 2016, Ally bank paid 1.00%, compared to today’s 0.50%. As the Fed hiked, history shows that the changes took time to reflect, and rarely moved in lock step with the Fed, unlike the rate cuts.