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I have some savings accounts in different banks and they all give 1.00% interest or less, and in many cases it is something ridiculous like $0.05

Would anyone be able to explain why this is happening?

  • 2
    I was almost about to merge this with money.stackexchange.com/questions/15246/…, but on second thought the other references Europe and Russia too and this one is more concise. I'll leave it stand alone. (I also cleaned up the prior comments.) – Chris W. Rea Sep 13 '13 at 17:39
  • It dates back to 2003 crisis: voxeu.org/article/us-monetary-policy-and-saving-glut They are trying to fix slowing economy with expansionary monetary policies. – yasar Sep 17 '13 at 18:31
  • I don't find any of the already given answers as satisfactory. First, my impression is that significant amounts of money are being lent by commercial banks. Secondly, the larger banks have had to set aside significant amounts of money to pay for what they knew was coming when the feds got closer to unraveling the 2007-08 meltdown. Latest crook seems to be Citibank at 7 billion. Credit card interest rates are not low, at around 10% or more. While I don't know what the applicable default rates are for commercial, personal or credit lending, my impression is that such lenders are making a real go – user19213 Jul 23 '14 at 19:39
  • There could be a bank run, what is my incentive to keep $275000.00 in Chase Bank at like .06%? – Lowbrow Jul 6 '18 at 0:54
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These rates are so low because the cost of money is so low. Specifically, two rates are near zero.

  1. The Federal Reserve discount rate, which is "the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window."

  2. The effective federal funds rate, which is the rate banks pay when they trade balances with each other through the Federal Reserve.

Banks want to profit on the loans they make, like mortgage loans. To do so, they try to maximize the difference between the rates they charge on mortgages and other loans (revenue), and the rates they pay savings account holders, the Federal Reserve or other banks to obtain funds (expenses). This means that the rates they offer to pay are as close to these rates as possible. As the charts shows, both rates have been cut significantly since the start of the recession, either through open market operations (the federal funds rate) or directly (the discount rate). The discount rate is set directly by the regional Federal Reserve banks every 14 days.

discount rate

federal funds rate

In most cases, the federal funds rate is lower than the discount rate, in order to encourage banks to lend money to each other instead of borrowing it from the Fed. In the past, however, there have been rare instances where the federal funds rate has exceeded the discount rate, and it's been cheaper for banks to borrow money directly from the Fed than from each other.

rates' comparison

  • great answer, thank you. Is there any signs of whether the rate will go up any time in the upcoming years? Or is it bleak? – Genadinik Sep 13 '13 at 16:37
  • @Genadinik I don't know. The Federal Reserve has announced that they're following the Evans Rule (which talks about inflation and unemployment) to determine when they should raise the federal funds rate, and I imagine the discount rate will be increased around that time as well. It's a bit long, but the president of the Fed bank in Chicago gave a speech describing the forecasting the Fed is using. – John Bensin Sep 13 '13 at 16:46
  • Your answer is basically that rates are low, because rates are low. The cost of money is the rate. – dcaswell Dec 17 '16 at 19:27
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There's two competing forces at work, and they are at work worldwide.

Banks can get money from several sources: Through inter-bank borrowing and from raising capital. Capital can come from from selling assets, stock offerings, deposits, etc.

The money the banks get from depositors is capital. In the United States, the Federal Reserve regulates the amount of capital that banks must maintain. If there was no requirement for capital then there would be zero demand for capital at an interest rate above the inter-bank offering rate.

As capital requirements have risen, banks are allowed to make less loans given a certain amount of capital. That has caused an increased demand for capital from depositors.

As described in this Federal Reserve ruling, effective January 1st, 2014 the Federal Reserve is again raising capital requirements.

As you can see here money can be borrowed, in the United States, at .0825% (100 - 99.9175).

Currently interest rates paid to borrowers are quite high compared to prevailing inter-bank rates. They could see more upward pressure given the fact that banks will be forced to maintain an increased amount of capital for a given amount of loans.

  • If demand for capital goes up shouldn't that force up savings rates to encourage people to save more in the bank? – Andy Jan 22 '15 at 23:28
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I've wondered the same thing. And, after reading the above replies, I think there is a simpler explanation. It goes like this. When the bank goes to make a loan they need capital to do it. So, they can get it from the federal reserve, another bank, or us. Well, if the federal reserve will loan it to them for lets say 0.05%, what do you think they are going to be willing to pay us? Id say maybe 0.04%. Anyway, I could be wrong, but this makes sense to me.

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