By Spencer Tierney
Despite the Federal Reserve’s increase to its key interest rate in December, the rates that banks offer on savings accounts remain stuck near historic lows.
So why haven’t they changed?
With the economy on the mend from the recession, the Fed raised its benchmark interest rate for the first time since 2008, when it hit nearly zero. The rate determines how much interest banks charge each other to borrow money.
Generally, when the Fed raises its rate, consumers see banks offer higher returns on savings accounts. But that’s not what’s happening.
“We’re in an unusual environment now,” says economist James Chessen, pointing to the sluggish growth rate of bank loans, which usually fuel the increase in savings rates.
Banks depend on deposits from consumer accounts to fund the lending that drives their profits. Banks raise savings rates to attract more people to open accounts — but only when loan demand is high.
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