Articles - Archived Feature

Why Are Today’s Deposit Rates So Low?

If you've checked your savings, checking and money market accounts lately, you may be asking yourself what happened…why have rates dropped so drastically in the last five years? You're not alone in asking this question. In recent years, there has been a visible decline in deposit rates offered by financial institutions. In 2006, it was not uncommon to find an account with a deposit yield above 4 percent; today, most are hovering around 1 percent or below.

Understandably, many customers are disappointed by this drop, as the earnings on their money have decreased. However, it is important to understand that these rates are tied to a number of economic factors—the same factors that are currently providing for lower mortgage rates.

Credit unions and banks retain complete control over rates they offer, but the factors that influence where they are ultimately set can change quickly. Financial institutions need a certain amount of money on hand so they can lend it when there is a demand for loans. Growth in deposits and borrowing are two ways by which a financial institution can increase their money on hand. However, to remain profitable, an institution must loan out money at a higher rate than it offers on deposits; otherwise, it would lose money and potentially cease to operate. Therefore, the deposit yield on a savings account, for example, will likely be lower than the interest rate on mortgages and other loans offered.

Rates are also influenced by the Federal Reserve, which can loan money to credit unions and banks at a discounted rate. The Fed can also set the rate at which financial institutions may lend money to one another, and generally the latter is set a little lower to encourage more lending.

When the economy struggles, the Fed often lowers these rates so financial institutions can more easily borrow money from the government. This capital, in turn, is loaned to fledgling businesses, which helps the economy recover. Conversely, when the economy is thriving, these rates are gradually raised to rein in inflation.

When credit unions and banks borrow from the Federal Reserve at a certain rate, it is not feasible to offer anything much higher than that rate on savings accounts. Mortgages, deposit yields and Federal Reserve rates are currently experiencing historic lows, and have been there since the recession began. As the economy continues to recover, these numbers will gradually rise and return to more familiar levels. In the meantime, pay off debts. Your debts (mortgage, auto loans, credit cards) probably have an interest rate much higher than 1 percent, which means a better return on your dollar.