Online Savings Rates Are Headed Lower
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What is the main topic discussed in this episode?
Here's your money briefing. I'm J.R. Whelan at The Wall Street Journal in New York.
How have online savings accounts outperformed traditional savings accounts recently?
While interest rates on traditional savings accounts have languished close to zero, online savings accounts have been offering much higher rates. But what goes up is now coming down. We'll have details in a moment. First, some money and market news you should know. Inflation in the U.S. inched up about a quarter percentage point in July as consumer spending remains strong. That puts inflation at 1.8 percent according to the Commerce Department, still below 2 percent where the Federal Reserve sees as a healthy level. You recall that low inflation, along with worries about slowing economic growth, was among the reasons that Fed officials voted in July to lower short-term interest rates. Many economists believe the country's low unemployment rate coupled with rising wages and strong consumer spending will eventually push inflation above the key 2% level.
Why are online savings rates starting to come down now?
And in July, consumers were indeed in a buying mood. Spending was up six-tenths of a percent from June and higher than May as well. Wages and salaries edging higher played a role, but so did the steady decline of gas prices. As of Labor Day weekend, the average price of a gallon of unleaded gas had fallen six straight weeks to $2.58. That's down about 30 cents from a year ago and the lowest price at Labor Day since 2016.
For about the last 10 years, it hasn't been easy making much money off of interest in traditional bank savings accounts. But online savings accounts offered very attractive rates. While recent actions by the Federal Reserve are changing that scenario, let's bring in Wall Street Journal reporter Alison Prang to run some numbers for us. So, Alison, banks have been reducing the interest paid on their online savings accounts for several months. It wasn't as if people were getting rich off the interest, but the rates were higher than the rest of the industry.
Which online banks offered the highest rates and how have they changed?
Oh, definitely. Yeah, it's way more attractive for a lot of consumers. I would imagine anyone who has money put away to be earning something northwards of 2% as opposed to, you know, if your typical savings account at a bank is a lot, lot, lot lower than that. So these are attractive options for a lot of people and still are even in this environment.
The Marcus online savings product owned by Goldman Sachs had one of the highest rates around for a long time.
They were one of them. There's a lot, actually, there's a number that pay above 2%. Marcus, I feel like, has been a really well-known option, being Goldman Sachs and whatnot that people have used. But for sure, there's a number of them that you can get this higher interest rate at.
How did some banks preemptively cut rates before the Fed's official move?
That's, I would say, above that, above 2%-ish.
So a lot of the big banks are offering these savings account products. The Marcus online savings product owned by Goldman Sachs had one of the highest rates around for a long time.
And they just came down over the summer now a couple of times. They were at 2.25 percent and they dropped it about 10 basis points. So 2.15 percent. And now most recently they said it's, you know, 2 percent. So that's even a more sizable drop than the previous one.
The online rate reduction has been going on, like you said, for a couple of months. What I thought was interesting is that some banks responded earlier in the year to just signals put out by the Fed before the Fed actually went ahead and pulled the trigger and lowered short-term rates.
Exactly. We wrote a story about that looking at when the Marcus rate was cut by Goldman and then also Ally had the same situation. And yeah, if you're a bank, I mean...
What trade-offs do banks face between attracting customers and protecting profits?
the more money you have to pay out in interest, it's pressuring your profits. And especially in a lower interest rate environment, banks are bringing in less money off interest from loans. So to protect your company's earnings, you want to cut back on costs. And that cost is one. They kind of ebb and flow together.
Well, there's a delicate balance here because one of the intents behind the big banks launching these savings accounts was to attract younger people to put money away and over time stay with the bank as they made more money, invest further, whether it be with more cash or stocks or mortgages and what have you, and just build up a brand awareness.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:09
2
How have online savings accounts outperformed traditional savings accounts recently?
0:09–0:57
3
Why are online savings rates starting to come down now?
0:57–1:59
4
Which online banks offered the highest rates and how have they changed?
1:59–2:38
5
How did some banks preemptively cut rates before the Fed's official move?
2:38–3:28
6
What trade-offs do banks face between attracting customers and protecting profits?
3:28–4:53
7
How do Fed policy signals translate into changes in consumer savings rates?
4:53–5:13
8
What should savers do now to find competitive high-yield accounts?
5:13–5:44
Speakers
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