The sixth Fed meeting of 2018 is scheduled to start Tuesday. The FOMC statement should be released on 2:00pm Wednesday. A rate hike is expected which will move the target federal funds rate range to 2.00% - 2.25%. A Fed rate hike on Wednesday would be the third rate hike this year and the eighth rate hike since the Fed began normalizing rates in December 2015. After Wednesday, one more Fed rate hike is likely for 2018. How will this affect deposit rates? To help answer that question, we did an analysis of our proprietary banking data with a focus on savings account yields since the Fed started raising rates.
Savings Account Rate Increases Are Accelerating
Savings account rates have generally been slow to respond to the Fed rate hikes. Only minor savings account rate gains were visible for the first three Fed rate hikes. That started to change after the fourth Fed rate hike in June 2017.
The following chart is an updated version of the March chart. It details how savings account rates have changed at online banks, bricks & mortar (B&M) banks and credit unions. The average rates at each of the three types of institutions are plotted starting in September 2014 and ending on September 2018. The chart is based on savings account data from 6,417 banks and credit unions.
The most apparent aspect of the chart is the yellow line which shows the rise of the average online savings account rate. A slow rise can be seen until June 2017. At that point, the slope begins to steepen.
Less noticeable is the rise of the average savings account rates for B&M banks and credit unions. The dark blue line represents the average savings account rate for B&M banks, and the light blue line represents the average savings account rate for credit unions. Both of these lines have been relatively flat, but that has been changing in the last year. Even for these institutions, savings account rates have been rising in 2018.
The following is an interactive chart of this same data which shows additional details. A summary of these details is listed below the interactive chart:
- Average savings account yields as of September 15, 2018 are as follows:
- 0.23% at B&M banks
- 0.22% at credit unions
- 1.35% at online banks (almost 6x the yield of B&M banks)
- Since the start of 2018, the percent yield increases of average savings account yields are as follows:
- 28% at B&M banks
- 16% at credit unions
- 42% at online banks
- Percent yield increases of average savings account yields for all of 2017 are as follows:
- 13% at B&M banks
- 6% at credit unions
- 32% at online banks
As can be seen in the data, savings account rates at all three institutions have been rising, with the largest increases occurring in 2018.
Online Savings Account Rates Continue to Dominate
The average savings account rates at B&M banks and credit unions have risen significantly, but they’re still much lower than the average rate at online banks. As of September 15, 2018, the average savings account yield at online banks is 1.35%, which is almost 6x the yield at B&M banks (0.23%).
Online savings accounts with rates much higher than the online average are readily available.
The highest nationally-available online savings account yield is 2.25% as of 9/24/18. This is up 60 basis points from early January when the highest yield was 1.65%.
Even the large and well-established online banks are offering savings account rates that are much higher than the online average. On December 29, 2017, I reviewed the 10 top savings accounts from the large internet banks with assets above $10 billion. The average yield of those 10 online savings accounts was 1.33%. The average yield of those top 10 has increased to 1.81% as of 9/24/18.
Large Banks Launch New Online Savings Accounts
Fueling the acceleration of online bank yield increases have been new online savings accounts launched in 2018 by several large banks. Examples of these banks, the new online savings accounts and their yields as of 9/24/18 are as follows:
- 2.11% APY at Vio Bank, division of MidFirst Bank, $15.4 billion in assets
- 2.10% APY (Agility Savings) at CIBC Bank USA, $26.4 billion in assets
- 2.01% APY at HSBC Direct, part of HSBC Bank USA, N.A., $178.6 billion in assets
- 2.00% APY at Citizens Access, division of Citizens Bank, N.A., $123.9 billion in assets
- 1.70% APY (Premium Savings) at E*TRADE Bank, $49.1 billion in assets
In July of this year, Citizens Bank launched a new internet division called Citizens Access.
Both MidFirst Bank and CIBC Bank introduced new versions of their online savings accounts. MidFirst Bank’s new online savings account is under its new Vio Bank internet brand. CIBC Bank didn’t create a new internet brand, but it gave its online savings account the name CIBC Agility Savings.
This year HSBC Bank decided to bring back HSBC Direct with a competitive online savings account rate, while E*TRADE Bank decided to introduce a new online savings account called the Premium Savings Account.
In the years between 2005 and 2009, HSBC Bank via HSBC Direct and E*TRADE Bank used to offer online savings accounts with very competitive rates. As the zero interest rate environment took hold, HSBC’s online savings account rate fell to near zero while other online savings rates held up much better. E*TRADE Bank decided in 2009 to shrink its banking business due to large mortgage-related losses during the housing crisis. First, the rate of its popular online savings account, the Complete Savings Account, became uncompetitive in 2009. Then in 2010, E*TRADE arranged with Discover Bank to transfer Complete Savings Accounts to Discover Online Savings Accounts for customers without E*TRADE brokerage accounts.
Competition and Fed Rate Hikes Pushing Up Online Savings Account Rates
A strong economy should keep the Fed on track for further gradual rate hikes. The strong economy in itself encourages higher deposit rates as increased economic activity spurs loan growth which requires deposit growth. Also, a strong economy helps stock market performance which encourages investors and savers to move money from deposit accounts into stocks. The need for deposits spurs competition which further drives up deposit rates.
We are well into a rising interest rate environment, especially at online banks. However, deposit rates will vary greatly. Many banks, especially the large B&M banks, continue to keep their rates low hoping that inertia will prevent most of their customers from moving their money. Consumers who shop around for the best rates and who embrace online banks will be able to benefit the most from higher interest rates.