Raising your rate in a falling-rate environment is about protecting your assets from inflation.
You may have heard that the Federal Reserve has started lowering interest rates. What might surprise you is that most Americans could actually raise their savings account rates even as interest rates move in a downward direction.
Original research by MoneyRates.com found that most of the money on deposit at American banks is with institutions that offer savings account rates well below the industry average and which are also a small fraction of the leading rates.
This means that, despite the falling-interest-rate environment, you might be able to earn 25 times more interest than you currently earn - or you could sit back and watch the amount of interest your savings earn dwindle as interest rates fall. The choice is yours.
Would Recession Mean Lower Interest Rates?
Why are falling interest rates of particular concern right now?
Much media attention has been focused on fed-rate cuts, but the underlying cause of falling interest rates is a growing sense that the economy is slowing down and might even lapse into a recession.
U.S. economic indicators
The second quarter of 2019 saw the annual rate of real GDP growth in the U.S. slow from 3.1 percent to 2.0 percent. Job growth, which averaged 223,000 per month last year is averaging just 158,000 per month so far this year. That means 2019 is on pace to be the slowest year for job growth since 2010, when the economy was still recovering from the last recession.
Housing and durable goods manufacturing, sectors of the economy which are considered indicators of where the rest of the economy may be heading, have also shown troubling signs of weakness this year.
Global economic climate and other indicators
Beyond the domestic scene, global signs are not good either.
Growth around much of the world appears to be slowing. Brexit has caused disruptions in Europe while tariff disputes have hurt U.S. exporters and disrupted international supply chains. The general mood of uncertainty makes consumers and businesses cautious, which only further weakens the economy.
How interest rates respond
The fed-rate cuts are a response to these concerns, intended to boost the economy by stimulating borrowing. Whether this is the right medicine at a time when mortgage, student-loan, personal-loan and auto-loan debt are all at or near record highs remains to to be seen. However, the Fed's actions are only one example of interest-rate weakness.
Treasury bond yields have been falling for several months, in some cases since late last year. Treasury yields often move before the Fed changes rates as bond traders try to anticipate economic trends. When yields fall, it's a sign that the bond market thinks the economy may be weakening.
Interest rates are largely a function of supply and demand. If people think the economy is weakening, there is less demand for borrowing and so interest rates fall.
For the time being, it doesn't even matter if these recession fears turn out to be right or not. Just the growing concern about the economy is enough to drive interest rates lower.
What Causes Savings Account Rates to Fall?
Despite the hype about the Federal Reserve Board's decisions to cut the federal funds rate, the Federal Reserve does not directly control the savings account rates banks offer their customers.
So, the fed-rate cuts announced in July and September will not directly result in lower interest rates on savings and other deposit accounts. However, those bank rates are likely to fall for the same underlying reason that the Fed is cutting rates: concern about the strength of the economy.
Banks use money in deposit accounts to make loans to other customers. The more profitable that lending business is, the more willing banks are to offer higher interest rates on deposits in order to have the funds to make more loans.
However, when banks see demand for loans fall, or if they grow cautious about the risks of lending money, they are less interested in attracting deposits. This means that concerns about a slowing economy could lead to lower bank rates.
Already, the MoneyRates America's Best Rates survey saw a slight slip in savings account rates during the second quarter, and there are individual examples of banks continuing to lower their rates since then. Since savings and money market rates are subject to change at any time, it's a good idea to keep a close eye on your accounts now to see if your interest rate has been cut.
Raise Your Interest Rate in a Falling-Rate Environment
All of this may make it seem inevitable that you will earn less interest on your savings in the months ahead. But what if you could flip the script and actually earn more interest while rates are falling for most people?
This is possible in part because there is a big gap between the highest bank rates available and the average offered by most banks. Therefore, unless you are already with a bank that offers one of the highest savings account rates, you could probably improve the interest rate you earn.
Chances are, you do have that opportunity to raise your interest rate even while most rates are falling. That's because most of the money on deposit in the U.S. is with banks that offer very low interest rates.
Most bank customers settle for less than the best
You'd think most consumers would be attracted to the highest rates; but, in banking, things like name recognition and marketing often lead consumers to make decisions that are not in their best interests. The rates people settle for are most often far less than the best.
There are over 5,000 FDIC-insured banks, but over half of all U.S. deposits are in just eight banks. The problem with such a large proportion of deposits being attracted to these few very large banks is that most of them offer very weak savings account rates.
Earn $200 vs. $44.10 or $8
As of mid-2019, the average savings account rate was 0.441% and several banks were offering rates of 2% or above. Unfortunately, though, those eight banks that dominate the deposit industry's market share offered an average rate of just 0.08%.
Converting those percentages into dollar figures might make the differences clearer: On a $10,000 account at a typical bank, you would earn $44.10 per year in interest. At one of the top banks offering 2% or better, you could earn $200 or more.
However, if your money is with one of those eight mega-banks like most U.S. deposits, you would be earning just $8 a year in interest.
The fact that consumers are settling for $8 a year when they could be earning $200 is unfortunate, but it also means there is a great opportunity for improvement.
When interest rates fall, even the top rates are likely to slip a bit. However, because there is such a huge gap between the top rates and the rates most of the mega-banks offer, there should still be room for most deposits to earn more interest even after the top rates have fallen somewhat.
That means that, if your savings are like most of the money on deposit at U.S. banks, you could easily raise your interest rates even while rates generally are falling.
Where You Are Likely to Find Better Savings Account Rates
How can you find a better rate on savings accounts and other deposits?
What you are likely to find is that getting a better rate may involve thinking beyond the household bank names with the most branches. Smaller banks frequently offer better rates than large ones.
An even better opportunity is to focus on online accounts. Online account rates consistently exceed those for traditional, branch-based accounts by a huge margin. Switching to online banking might be the key to raising your interest rate in a falling-rate environment.
Lock in Today's Rates Before Further Rate Cuts Happen
If you are concerned enough about the economy to expect interest rates to continue to fall, you might want to lock in a rate now before they fall any further.
Unless you have a near-term need to access your money, this might be a good time to move some of your savings from a savings account to a certificate of deposit. Generally speaking, CD rates are higher than savings account rates and, in a falling-interest-rate environment, CDs have the added advantage of allowing you to lock in a rate so your interest will not continue to decline.
Raising your rate in a falling-rate environment is about more than the opportunity to make more money. It is a necessary step to protect what you already have.
Most savings account rates are already running below the rate of inflation. That means the money in those accounts is actually losing purchasing power. If interest rates keep falling, those bank customers might find themselves falling further and further behind inflation.
So the choice is yours. You could sit back and lose money as a result of the falling-interest-rate environment, or take this opportunity to actually improve your interest rate.
Are your CDs losing value to inflation? Try our CD inflation calculator