Why Savings Account Interest Rates Are So Low

By Miranda Marquit on 17 April 2013 (Updated 8 July 2014) 10 comments

In 2006, I started writing about personal finance. One of the first topics I wrote about was the online high-yield savings account. (See also: The Best 5 Online Savings Accounts)



But why are interest rates so low on savings accounts? Shouldn't we want to encourage savers in our current economy?

Depositors vs. Borrowers




So why even pay depositors at all? The reason is that banks are required to keep some capital in their reserves. They are required to keep money in — for lack of a better word — the vault in order to lend. For the most part, credits and debits appear on paper and digitally. But those records have to show that the bank has money in reserve.

Hence the need for depositors.


The Federal Reserve and Savings Account Rates

So why are mortgage (and other loan) rates so low? What sets those rates?


  • Federal Discount Rate: This is the rate at which the Federal Reserve lends money to the banks.
  • Federal Funds Rate: This is the rate we're all familiar with when the news talks about the Fed "setting rates." This is the rate at which banks can lend money to each other.



Lower Fed Rates Encourage Borrowing



Fed Purchases of Treasuries Reduce Mortgage Rates



When Will Savings Account Rates Go Up?






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Guest's picture

Bond yields are super low for the same reasons. Many of them aren't keeping up with inflation. It's rough for seniors, who are more heavily invested in bonds!

Guest's picture

Thank you for this article, it was really interesting and I learned a lot!

Guest's picture

Nice one. I think the interet rates are determined by the current interest rate and the banking operations thus making them low.

The Family CEO's picture

I agree it seems like the low interest rates are here to stay, at least for a while. While I love my 3% mortgage, it certainly makes it frustrating to be a saver.

Guest's picture

The government will certainly leave interest rates low through the next election, to buy the votes necessary to keep the Dems in power. (not that the Republicans would have done differently). Alas, I can see political parties buying elections for the forseeable future, until the U.S.A. goes the way of the Roman empire. I'll vote Libertarian until then, thank you. I never thought I'd see the story of 'The Little Red Hen' come true....

Guest's picture

The people with savings accounts need to cash out of the banks and sit on their cash. With the banks having all the people remove their cash they would be forced to raising the interest rates! Lets get moving people....... Pass this on and lets get those rates up!

Guest's picture

I'm very disappointed in the low savings rate. For me personally, at this time, as long as rates remain low I will stay thrifty and spend little discretionary money. And I'm way to worried to take what little money I do have and 'invest' it.

Guest's picture

If people start taking their money out of these banks the rates will go up really fast. Look at what they charge on credit cards, but they think we should just keep our money in their establishment for basically nothing. Take your money out and go to a credit union...send them a message!!

Guest's picture

Credit Unions pay no better interest rate then Banks. At least years ago US Savings Bonds were great you could double your income every 7 years or so. You would think with the Government hurting so bad they would bring those savings bonds back.
It seems when Reagan signed the Gramm-Rudman Laws not only lowering interest but also taking away the interest deductions on taxes it was the beginning of the end.

Guest's picture

Older people depend on and need their savings account interest to supplement their income and when they spend it,it helps the economy. But of course with the help of our government, only the Wall St. thieves end up with it.

Banks have plenty of money and many other accounts to pay interest savings from.
Payment shouldn't have to depend on what the personal borrowing and lending market do.