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Where’s My Rate Hike?

Richard Connor

RISING INTEREST RATES are impacting everyone. The Federal Reserve has raised short-term rates at its last five meetings. It hiked interest rates 0.75 percentage point at its September meeting, the third time this year it’s raised rates by that amount. Bankrate reports that current projections see the Fed boosting rates by another 1.25 percentage points before year-end.

These increases affect what consumers pay for mortgages, car loans and credit card debt. As I write this, Bankrate says the current average rate for a 30-year fixed-rate mortgage is 7.06%. This is almost half a percentage point higher than a week ago.

With all these rates rising, why aren’t my bank accounts following this meteoric path? Capital One 360 Savings is currently paying 2.2%, but its checking account still pays just 0.1%. That 0.1% is also typical for savings accounts from big banks, according to Bankrate. Meanwhile, one-year CDs are 3.25% and five-year CDs are 3.5%. Vanguard Federal Money Market Fund (symbol: VMFXX) is yielding 2.78%.

I understand that banks need a margin between what they charge customers to borrow money and what they pay savers on deposits. The difference is how they earn a profit. But it always feels like the borrowing rates go up faster than the savings rate.

Earlier this week, The Wall Street Journal ran a story that helped explain this phenomenon. The article said large banks have plenty of cash to cover all their lending, so they don’t need to raise rates to attract new savings.

Some banks have increased their yields, especially online banks, in response to the Fed’s rate increases. But there are many still paying paltry interest. My TD Bank checking account is paying 0.1%. How do banks get away with this?

I was surprised to learn that the problem is us, the saver. Apparently, we don’t seek out higher rates. Inertia keeps us in our current accounts because we view switching as painful.

Depending on your balance, the increased interest payment may not be worth the trouble. The Journal article said the median bank account balance in 2019 was $5,300. As the reporter noted, earning 3% in interest, rather than 0.1%, would only amount to some $160 a year. Many of us don’t find that a compelling reason to switch.

People with larger balances have a greater incentive to change. That same three-percentage-point increase in rates on a $50,000 balance brings a $1,500 reward. That is indeed worth a little effort.

I think one reason for our inertia is that many of us have automatic withdrawals and deposits linked to our accounts. Changing may entail more than simply setting up a new account. We may need to adjust multiple regular transactions, such as our Social Security deposit and our monthly health insurance payment.

One option is to have two accounts. One would be for monthly transactions. That account could be the repository for regular deposits and have enough funds to cover monthly expenses. This account should be convenient and easy to use, with up-to-date security measures and bill-paying capabilities.

Another account could hold the bulk of a family’s cash reserves—money we want to keep liquid, but don’t need on a regular basis. This is the account we could move to a higher-yielding account whenever it makes sense. Creating new online accounts is relatively easy, so it’s not a big burden. I’ve done a little of this over the years. Still, I have to admit, I’m as susceptible to inertia as the next person.

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