Odd Lots Why Interest Rates on Savings Accounts Are Still So Low
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Feb 23, 2023 Joe Abate, a money market strategist at Barclays, delves into the puzzling phenomenon of low interest rates on savings accounts, which linger around 0.23% despite rising benchmark rates. He explains why many banks resist increasing these rates and discusses the implications for consumers and economic policy. The conversation also dives into how bank competition and consumer loyalty shape deposit rates, the evolving role of retail deposits, and the broader impact of Federal Reserve policies on financial stability.
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Low Savings Rates
- The average interest rate on US bank accounts is surprisingly low (0.23%) despite high benchmark interest rates.
- This is frustrating for savers and raises concerns about monetary policy effectiveness.
Deposit Rate Dynamics
- Banks have pricing power due to limited substitutes for deposits with similar liquidity and insurance.
- Deposit rates rise slowly initially but increase as banks compete for deposits later in a tightening cycle.
Declining Deposit Betas
- Deposit betas, the relationship between benchmark and savings rates, are declining.
- This might be due to excess deposits from QE and non-price competition (services) among banks.