January 28, 2023

When the Federal Reserve hikes interest rates, the interest rate on your savings account usually follows in step. But recently, that logic hasn’t held up.


The Federal Reserve has been raising interest rates steadily over the past year, but the average national rate for savings accounts has remained stubbornly low. Wailin Wong and Adrian Ma from our daily economics podcast The Indicator explain why.

WAILIN WONG, BYLINE: So first, a quick reminder about what banks do, which is move money around. They take in money from depositors – people with, say, savings accounts – and then they take those deposits and lend them out, for instance, in the form of small business loans. For people with savings accounts, banks decide how much interest to pay you – a savings deposit rate – you know, how much they’ll reward you for stashing money in the bank’s metaphorical vault.

ADRIAN MA, BYLINE: 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 late last year, 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. 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.

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.

MA: Adrian Ma.

WONG: Wailin Wong, NPR News.

Copyright © 2023 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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