Why You Don’t Feel Fed Rate Hikes in Your Bank Account

Nine years after a global financial crisis caused U.S. interest rates to plunge, they are finally starting to rise again. The Federal Reserve began hiking the funds rate in December 2015, and the Federal Open Market Committee, led by Chair Janet Yellen, voted to boost rates another three times, including last month.

Higher rates for the Fed don’t automatically mean higher rates for consumers, though. The Fed directly controls the rate that banks charge each other for overnight deposits, but it has only indirect influence on other interest rates set by banks and the bond market.

So, 20 months after the first Fed rate hike, savers are still waiting for higher yields on their nest eggs, according to data provided by Bankrate.com. Interest rates for borrowers — on mortgages, auto loans, credit card debt — are mostly higher, but rates on some products have barely budged. By shopping around, both savers and debtors can get much better deals.

One goal of the Fed’s monetary policy is to keep a lid on inflation. Young consumers today won’t remember the 1970s and 1980s, when rapidly rising prices could quickly erode the value of your cash. U.S. consumer prices rose just 1.6 percent in the 12 months ending in June.

Even in this era of low inflation, money in the bank is losing buying power. That problem is exacerbated by the low rates that banks are paying on deposits. According to Bankrate.com, the average rate on a U.S. money market account has gone from a microscopic 0.1 percent 20 months ago to a miniscule 0.12 percent now. Prices, meanwhile, are rising 13 times faster.

Most banks have little incentive to boost rates on savings accounts or certificates of deposit, because they already have a glut of their customers’ money. Some of the very biggest banks pay their customers the least. Rates on basic savings accounts at JPMorgan Chase, Bank of America, and Citibank start at 0.01 percent, and generally don’t exceed 0.08 percent, even for customers with millions of dollars in the bank.

“The biggest players don’t need to compete for deposits,” Greg McBride, Bankrate’s chief financial analyst. “They’ve got branches on every corner.”

Customers could increase their yield 100-fold by moving their money to banks who do need the money. The most generous online banks are now offering yields of 1.3 percent or more. Many are regional banks with idiosyncratic reasons for needing deposits. They may specialize in a type of lending that’s growing fast, for example (such as loans to apartment building owners, who can refinance because property values have risen). There’s little risk in trying out an obscure bank, as long as the deposits are insured by the Federal Deposit Insurance Corp., which guarantees up to at least $250,000 per person.

While customer inertia is keeping rates low on savings accounts, there’s better news on auto loans. Fierce competition means low rates for car buyers.

Lenders can afford to offer these rates–sometimes lower than on home mortgages–because they’re aggressive about re-possessing the cars of borrowers who miss payments, McBride said. Auto defaults are soaring, too.

Rates on home loans, meanwhile, are more influenced by the market prices for long-term bonds than they are by the short-term Fed funds rate. Mortgage rates actually fell in the year after Yellen started her rate hikes, but they’ve rebounded since then.

For better or worse, Yellen and company can have a more direct impact on people with credit card debt. Most card rates automatically follow the prime rate, a bank-set number that closely follows the Fed funds rate.

Even here, though, consumers have opportunities to shop around. Cards with limited-time rates of zero percent are still available to people with good credit scores.

On June 30, America’s largest credit union dropped its basic credit card’s rate by two percentage points. The Navy Federal Credit Union’s Platinum card rate fell to an annual rate of 6.74 percent. That rate cut was, counterintuitively, prompted by Yellen’s rate hike. “We saw this as an opportunity to separate ourselves, [and stand] out from peers and competitors,” said Matt Freeman, head of credit card products at the credit union, which serves veterans and employees of the U.S. Department of Defense.