Why Rising Interest Rates Aren't Being Passed Along to Savers

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Interest rates in the bond market have risen dramatically this year, which has left borrowers shopping for mortgages or car loans facing higher financing costs.

But here's the paradox: Even though rising rates have made it more costly to borrow, savers haven't seen much improvement on the interest rates they're getting on savings account balances and bank certificates of deposit.

Rates on Savings Have Barely Budged

In the money-market account category, savers have actually seen the rates they get paid fall, despite the run-up in bond-market rates. Average rates have fallen from around 0.50 percent this time last year to 0.40 percent currently, according to Bankrate.

Looking at the average isn't always the best indication of the rates available, as it includes offerings from stingier banks that you'd want to avoid in any event. But even among banks paying the best rates on money-market accounts, it's hard to find any bank offering more than 1 percent. General Electric's (GE) GE Capital Bank and CIT's (CIT) CIT Bank both weigh in at 0.90 percent, while Ally Bank and American Express (AXP) Bank currently pay 0.85 percent.

CD Rates: Better But Still Bad

On the CD front, savers are faring a little bit better. After having fallen as low as 0.5 percent earlier this year, rates on one-year CDs have bounced back to about 0.7 percent. That's still below where they were in late 2012, though, and top rates from GE and other banks only fetch about 1.05 percent.

Even if you're willing to lock up your money for a longer period of time -- five years -- banks are still pretty tight-fisted, with rates averaging 1.35 percent. That's up only slightly from mid-year lows around 1.15 percent. Although a few outliers will top the 2-percent mark, five years is still a long time to lock in rock-bottom savings rates -- especially when five-year CDs paid well over double that rate before the financial crisis.

What's Behind the Skimpy Rates?

Savers aren't benefiting from the rise in interest rates for a couple of reasons.

First, although rates in the bond market have gone up, the biggest increases have been for long-term bonds with maturities of between 10 and 30 years. Those long-term securities are the ones that have traditionally been least under the control of the Federal Reserve, and market participants expect that the Fed will loosen its grip on long-term rates long before it starts to push short-term rates higher. Because the Fed is still firmly committed to low short-term rates, Treasury bills and other short-term investments are still paying even lower rates than what the best banks will offer their customers.

Second and perhaps more importantly, savers have been willing to take whatever income they can get on savings, with many perceiving the alternatives as being too risky. Stock markets have risen to new record highs, making many savers fearful that moving money from savings accounts into stocks now could end up costing them if there's a market correction. Meanwhile, bond funds that concentrate on longer-dated income investments have dropped considerably in value this year, as higher rates have hurt the value of their existing investments and have created negative returns for surprised conservative investors.

When Will Rates Rise?

Unfortunately for savers, most analysts expect Janet Yellen, the nominee to take Ben Bernanke's place as chair of the Federal Reserve, to keep interest rates low for a considerable period. Until the Fed moves short-term rates higher, most banks won't feel much pressure to raise the interest rates they offer. So unless savers start voting with their feet en masse, they probably won't see considerable increases in income anytime soon.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. He doesn't own shares of the stocks mentioned in this article. The Motley Fool recommends American Express. The Motley Fool owns shares of General Electric.

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65 Comments

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joewilson1943

I guess it's time for savers to form some kind of union against the banks if we could get savers to stick together and boycott them until rates return to somewhat normal.

February 06 2014 at 3:29 PM Report abuse rate up rate down Reply
1 reply to joewilson1943's comment
joewilson1943

I wasn't referring to a credit union, around here credit unions are just as bad as the banks on interest rates on savings.

February 06 2014 at 3:31 PM Report abuse rate up rate down Reply
annedyth

I just wish there was a way to do without banks.

November 20 2013 at 2:27 AM Report abuse +2 rate up rate down Reply
1 reply to annedyth's comment
jrgumshoe

They do sort of leave you powerless. They're very greedy.

November 20 2013 at 3:06 AM Report abuse +1 rate up rate down Reply
unitedpaintings

Liberal bankers screwing America again.

November 19 2013 at 4:49 PM Report abuse -1 rate up rate down Reply
1 reply to unitedpaintings's comment
attyacampbell

Liberal bankers is an oxymoron isn't it?

November 19 2013 at 5:07 PM Report abuse +1 rate up rate down Reply
newsmyrnasuite

What ever happened to "moveyourmoney.org. Find a credit union and move your money out of these banks. Starve them into offering better rates.

November 19 2013 at 4:30 PM Report abuse rate up rate down Reply
pdbliz

I have a question for the people....
RETIRES got only 1 .5 % raise for 2014.......WELFARE EBT CARD HOLDERS has gotten nearly 24.6 % raise since 2006.....
WHAT HAS HAPPEN.?????? Are the retired people getting the shaft.?????

November 19 2013 at 2:56 PM Report abuse rate up rate down Reply
weilunion

This is bankster theft. And it will not work. Printing more money and keeping interest rates low is good for the rich, bad for the worksing class.

November 19 2013 at 2:51 PM Report abuse +3 rate up rate down Reply
gdurdeniii

Federal money, virtually free to banks, and the use of everyday American savings for little or no cost, has saved the banks at the expense of the average citizen. A real-time reward for their bad business practices.

November 19 2013 at 12:47 PM Report abuse +4 rate up rate down Reply
Big Jim

Instead of paying higher interest rates, banks are using that money to keep their CEO's out of prison.

November 19 2013 at 12:31 PM Report abuse +2 rate up rate down Reply
foxylynx

They want people to get back in the stock market - then, of course, there will be another crash and most of the money will be sipfoned up to the wealthy.

November 19 2013 at 12:21 PM Report abuse +2 rate up rate down Reply
lylenpat

You should have asked this question 5 years ago. Notice, the lending institutions charge interest of 12 to 30 percent on credit cards and the like. Notice, the same institutions have paid out only 1 percent or less on savings, 3 percent or less on CD's and the like. Notice, during the same time frame, financial CEO's and their underlings have garnered massive bonus's because they are showing massive profits. GET THE PICTURE.

November 19 2013 at 12:20 PM Report abuse +4 rate up rate down Reply
1 reply to lylenpat's comment
sam54ct

Sorry, it was taking place long before Obama and the 5 years you mentioned. There are no protections for us, the public, its all about letting business screw us to the bone.

November 19 2013 at 2:51 PM Report abuse +4 rate up rate down Reply
1 reply to sam54ct's comment
Mark Benton

I agree it was set in motion years ago before obama bush and even clinton u give the people hope then crush it thats how control os maintained

November 19 2013 at 5:34 PM Report abuse +1 rate up rate down