The fourth Fed meeting of 2019 is scheduled to start Tuesday. The FOMC statement should be released on 2:00pm Wednesday. The expectation is for the Fed to continue to hold steady on rates. However, odds have been rising that the Fed will cut rates. The CME FedWatch Tool still shows that the highest odds are that the federal funds target rate will remain unchanged (80.8% remaining the same vs. 19.2% cutting by 0.25%). However, the odds of a rate cut rise dramatically for the Fed’s July meeting (only 15.7% odds of remaining the same). On Wednesday, the FOMC statement, the Fed Chair’s press conference and the Fed’s economic projections should provide insights if those odds are reasonable. For now, one thing that seems very likely is that we have reached the peak in this Fed rate cycle.
I thought it would be interesting to see how savings account rates have responded this year during the Fed pause. 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 in December 2015.
Savings Account Rates Start to Plateau
The following chart is an updated version of the December chart. It details how savings account rates have changed at online banks, brick-and-mortar (B&M) banks and credit unions. The average APYs at each of the three types of institutions are plotted starting in September 2014 and ending on June 2019. The chart is based on savings account data from more than 6,000 banks and credit unions.
During the time when the Fed first started to hike rates, savings account rates were slow to respond. 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.
From June 2017 to December 2018, savings account rate gains were accelerating . This can be seen in the chart as the slope became steeper. The maximum steepness started around March 2018 and continued through 2018. Then in 2019, the slope became more gradual. Rates have still been rising, but they haven’t been increasing as they were in 2018.
The rising slope can be seen for all three types of institutions, but it’s most evident for online savings accounts. The average online savings account APY is represented by the yellow line. 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 APY for B&M banks, and the light blue line represents the average savings account APY for credit unions. Both of these lines have been relatively flat. The second chart just shows the averages for only B&M banks and credit unions. This makes the slope changes more apparent. Like the online savings account average, the steepest slopes are in 2018. The slopes are becoming less steep in 2019.
The following is a summary of the increases as shown in the charts of the average savings account yields for the three types of institutions for the last three years. As can be seen, the rate increases are slowing down in 2019.
- 2019 (up to June):
- 8% at B&M banks
- 9% at credit unions
- 11% at online banks
- 44% at B&M banks
- 21% at credit unions
- 60% at online banks
- 13% at B&M banks
- 6% at credit unions
- 32% at online banks
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 June 2019, the average savings account yield at online banks is 1.69%, which is 6x the yield at B&M banks (0.28%).
Credit unions continue to lag B&M banks. The average savings account yield at B&M banks now exceeds the yield at credit unions by 3 bps. Credit unions started to lag in June 2018.
Average savings account yields as of June 2019 are as follows:
- 0.28% at B&M banks
- 0.25% at credit unions
- 1.69% at online banks (almost 6x the yield of B&M banks)
Online savings accounts with rates much higher than the online average are readily available. The highest nationally-available online savings account yield without large balance requirements is 2.52% as of 6/17/2019. This is up by only 2 bps from December when the highest yield was 2.50%. Several well-established online banks offer savings account yields of at least 2.20%. You can find the highest rates by using our savings account table and money market table.
Savings Account Rates for Rest of 2019
If the Fed does cut the federal funds target rate this year, history shows that savings and money market account rates will also fall. There will be some lag. The size of the lag can be estimated using my weekly summary data from 2007, when the Fed last transitioned from a pause to a rate cutting phase.
The last Fed rate cycle began on June 30, 2004 when the Fed began a long series of rate hikes. The last of these rate hikes took place on June 29, 2006 when the federal funds target rate reached 5.25%. The federal funds target rate remained at 5.25% until September 18, 2007. On that date, the Fed cut the rate by 50 bps to 4.75%. The Fed continued to make cuts until the federal funds target rate reached a bottom, a range of 0% to 0.25%, on December 16, 2008.
I looked at how savings and money market rates declined after the first Fed rate cut on September 18, 2007. Using my 2007 weekly summary data, I tracked the average yields of 20 rate-leading online savings and money market accounts before and after that first rate cut. Just before the Fed rate cut, the average of those 20 savings and money market accounts was 5.24% APY. By the end of October 2007, the average had fallen 25 bps to 4.99% APY, and 16 out of the 20 accounts had rate cuts.
In summary, I expect online savings account rates to hold fairly stable as long as the Fed holds rates steady. When the Fed finally starts cutting rates, online savings account rates will certainly fall. There will be some lag, but as history shows, expect cuts within a month or two after the Fed rate cut.