By Anita Hamilton
It isn't your imagination. Interest rates on deposits in typically high-yielding online savings accounts have fallen in recent months.
Ally, American Express, Discover, and Marcus by Goldman Sachs have all pulled back on rates this year. That has contributed to a decline in average rates on online savings accounts from the recent high of 4.486% in January to 4.401% this month, according to data from DepositAccounts by LendingTree.
A drop of less than a tenth of a percent might seem academic, considering that an investor would need a balance of $100,000 to see a $85 decrease in accumulated interest over the course of a year. What makes the dip noteworthy is that the cuts have come even as the Federal Reserve has held its own benchmark rate steady since last summer. While Fed rate cuts are expected sometime this year, the market isn't pricing one in until September.
"You would think [interest rates] would hold steady at least until we approach a Fed rate cut and that doesn't seem to be near yet," says Ken Tumin, DepositAccounts' founder and senior industry analyst at LendingTree.
That's not always the case. "Bank rates are not just driven by federal funds rates. They're driven by funding need -- meaning how much does a given bank need in deposits," says Nathan Stovall, director of Financial Institutions Research at S&P Global Intelligence.
Goldman Sachs says the 4.4% rate on its Marcus accounts -- down from 4.5% earlier in the year -- is still well above average. "Our current rate places us ahead of the majority of our peers and is 8X the national average," spokesperson Nick Carcaterra told Barron's.
Why banks are lowering savings rates
"The reason that banks lower their yields is largely associated with their desire to house funding," says Bankrate economic analyst Mark Hamrick. With new mortgage originations still at historic lows, they may be feeling less of a need for deposits to offset loans.
Banks are also seeing smaller margins on deposits, which also include certificates of deposits and money market accounts, as their costs for that money increase in the form of higher yield payouts. Some are now cutting payouts to depositors to try to boost returns.
"This is the way the banking system works. I don't think they're being greedy at all," says Stovall. "I look at it as a reflection of them testing the waters to see 'If I cut rates, will my customers leave?'"
Why customers might not balk at lower rates
Historically, that answer has been no. "These accounts do tend to be pretty sticky," Mark Hamrick, senior economic analyst at Bankrate, says of savings accounts. What is more, online savings rates remain relatively high, especially compared with the average savings account, which pays out an annual percentage yield of just 0.53%.
Rate chasing for the highest-yield savings account has its drawbacks. High interest rates are often limited offers that vanish within a few months, Tumin noted, which can leave savers with an unpleasant choice: settle for the lower rate, or take on the hassle of moving the money again.
They should also consider the overall financial health of the institution where they put their money, although deposits of $250,000 or less are covered at banks insured by the Federal Deposit Insurance Corp.
If you're saving for the long term, it also pays to consider other factors. On the list are fees, the ability to transfer funds electronically to and from other accounts, and the quality of customer service.
Write to Anita Hamilton at anita.hamilton@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 21, 2024 01:30 ET (05:30 GMT)
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