Savings account rates have surged to their highest levels in over 6 years, according to data released this week. As banks aggressively compete for deposits to fund rising loan demand, they are offering eye-popping yields to attract customer funds.
Savings Accounts Rates Reach Highest Levels Since 2018
The national average savings account rate has climbed to 2.15% annual percentage yield (APY) as of January 5th, 2024, according to data from Forbes Advisor. This represents the highest average savings yield since July 2018, when rates last peaked at 2.19%.
Several banks are now offering yields above 6% APY in an effort to rapidly expand their deposit bases. The top rates as of this week include:
|Savings Account Rate
These exceptionally high yields mark a dramatic turnaround from 2020-2023, when the average savings rate languished below 0.10% as the Federal Reserve slashed interest rates to combat the COVID-19 recession.
Surging Loan Demand Driving Battle for Deposits
With the US economy on solid footing in 2024, banks have seen loan demand stage a strong recovery. Total bank lending expanded by over 10% last year.
This loan growth has left some banks short on deposits to fund additional lending. While deposits remain flush for the banking system as a whole, the deposits are unevenly distributed across banks.
Smaller banks and online banks find themselves at a particular disadvantage in sourcing deposits to keep pace with demand. This has kicked off an intense battle among these banks to offer ever-higher deposit rates to attract new customers.
“The tremendous loan growth is putting real strains on some banks’ funding capacities,” said Brian Lord, banking analyst at Smith Barney. “We’re seeing funding gaps emerge, leading to this competition bidding up deposit costs.”
Fed Rate Hikes Also Playing a Role
The Federal Reserve’s rapid interest rate hikes over the past year are also contributing to the push higher in deposit rates. As banks’ funding costs rise, they are passing along some of these higher rates to customers in the form of higher yields on savings products.
The Fed raised its benchmark rate by 50 basis points last month – the seventh straight meeting with a rate hike – pushing the target fed funds rate range to 4.25-4.50%. Additional hikes are expected in early 2024.
These Fed rate increases have caused yields on short-term Treasury bonds and money market mutual funds to move significantly higher as well. Banks feel compelled to raise deposit rates accordingly to remain competitive.
“Banks can’t keep yields on savings products artificially low when risk-free rates are rising so fast,” said Marcia Frost, banking strategist at Morgan Stanley. “They have to pass through much of this increase to avoid deposit flight.”
Will High-Yield Savings Rates Last?
The key question is whether these lofty savings account yields will persist. History suggests they may not.
Previous cycles have shown deposit rate competitions flare up in periods of strong loan demand, only to fizzle out fairly quickly. Once banks secure adequate funding, the incentives to pay up for deposits fade.
However, some banking experts believe higher rates may endure this time. Ongoing strong economic growth, rising rates from the Fed, and robust lending activity point to healthy dynamics for banks. In this environment, the battle for deposits could rage for some time.
“I think these 6% savings yields are just the tip of the iceberg,” said Frost. “Banks know deposits are the lifeblood. With lending expanding so rapidly, the fight for funding will only intensify.”
Consumers Set to Benefit
While uncertainty remains around how long elevated savings rates could last, consumers stand to benefit tremendously in the meantime from substantially higher yields.
Shrewd savers can capitalize on these competitive dynamics by shopping around for the best rates. Opening accounts at the highest-paying banks offers the opportunity to generate vastly more income on savings than the rock-bottom rates that prevailed over the past few years.
“This represents a rare moment for consumers where banks are literally paying customers cold hard cash to move money their way,” said Lord. “Savers would be crazy not to take advantage while these lofty deposit offers persist.”
The acceleration in deposit rates also comes at a crucial time with inflation still running high at over 6% annually. The combination of surging bank yields and elevated consumer prices marks a distinct reversal from the trend that has dominated since the Great Recession.
“For the better part of 15 years, bank yields have lagged badly behind inflation – eroding many savers’ purchasing power,” said Frost. “Now the stars have aligned: yields are leading inflation higher. Households may finally get some relief.”
So for at least the near term, the stars seem to be aligning for savers. With banks duking it out for deposits, consumers can let the competition work to their benefit by seeking out the most attractive rates. Whether the boom times in savings yields have lasting power remains to be seen. But for now, the incentives to switch to high-yield accounts look increasingly compelling.
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