The last 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 2.25% - 2.50%. A Fed rate hike on Wednesday would be the fourth rate hike this year and the ninth rate hike since the Fed began normalizing rates in December 2015. The gradual rate hikes this year may not repeat in 2019. There have been signs the Fed may decide to slow down or pause rate hikes in 2019. We’ll see on Wednesday if the Fed indicates any changes for 2019.
How will the Fed’s action on Wednesday and its forecasts for 2019 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 Rates Continue To Rise
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.
The following chart is an updated version of the September chart. It details how savings account rates have changed at online banks, brick-and-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 December 2018. The chart is based on savings account data from more than 6,000 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. Another steepening of the slope began in March 2018. From March 2018 to December 2018, the average online savings account APY has risen by 50 bps from 1.02% to 1.52%.
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.
Brick-and-Mortar Banks Overtake Credit Unions
During the years of the zero interest rate environment, credit unions generally offered higher savings account rates than the B&M banks. This can be see in the chart. From September 2014 to March 2018, the average savings account rates at credit unions were around two basis points above the average savings account rates at B&M banks. That started to change in 2018. In June 2018, B&M banks had overtaken credit unions. The average savings account rate at B&M banks was 0.21% vs. 0.20% at credit unions. That spread held constant as both averages increased, but recently that spread has widened. In December 2018, the average savings account rate at B&M banks was 0.26% vs. 0.23% at credit unions.
Why has savings account rates at B&M banks overtaken credit unions? More and more B&M banks have been introducing their own online savings accounts that must be opened online. These online accounts are designed to compete with the online-only banks and prevent customers from moving all of their deposits to the online-only banks. Several credit unions have also introduced online savings accounts for this same reason, but this is a little more common at the B&M banks. Thus, we’re seeing the average savings account rate rise more at B&M banks than at credit unions.
The following are two interactive charts of this same data which show additional details. The first chart shows the average rates from savings accounts at online banks, B&M banks and credit unions. The second chart focuses in on just B&M banks and credit unions to highlight the B&M banks overtaking credit unions. A summary of these details is listed below the interactive charts:
- Average savings account yields as of December 13, 2018 are as follows:
- 0.26% at B&M banks
- 0.23% at credit unions
- 1.52% at online banks (almost 6x the yield of B&M banks)
- For the year 2018, the percent yield increases of average savings account yields are as follows:
- 44% at B&M banks
- 21% at credit unions
- 60% 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 December 13, 2018, the average savings account yield at online banks is 1.52%, which is almost 6x the yield at B&M banks (0.26%).
Online savings accounts with rates much higher than the online average are readily available.
The highest nationally-available online savings account yield is 2.50% as of 12/17/18. This is up 85 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 2.08% as of 12/17/18. Interestingly, this is an increase of 75 bps, the exact increase of the federal funds rate since that time.
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. I listed five of these online savings accounts in September. Below is an updated list of these with one additional bank. Yields are current as of 12/17/18:
- 2.35% APY (PNC High Yield Savings) at PNC Bank, $368.6 billion in assets
- 2.35% APY (High Yield Online Savings) at Vio Bank, division of MidFirst Bank, $16.5 billion in assets
- 2.25% APY (Online Savings) at Citizens Access, division of Citizens Bank, N.A., $126.9 billion in assets
- 2.16% APY (CIBC Agility Savings) at CIBC Bank USA, $27.1 billion in assets
- 2.05% APY (HSBC Direct Savings) at HSBC Direct, part of HSBC Bank USA, N.A., $172.4 billion in assets
- 1.90% APY (Premium Savings) at E*TRADE Bank, $48.9 billion in assets
PNC Bank is the latest large bank to introduce a high yield online savings account. In October, the bank introduced an online savings account called the PNC High Yield Savings. It currently has a 2.35% APY on all balances. PNC is only offering the account in areas which do not have PNC branches.
The fourth largest U.S. bank by assets, Citibank, has also come out with an online savings account. However, Citibank doesn’t appear to be committed to a high yield for the long term. Thus, I’m not adding it to the above list. Citibank is only promoting a 2.15% interest rate for the first three months. After the promotional period, the rate falls to B&M levels. The promotional rate also requires a large balance of $25k, and it must be opened in a checking account package.
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.
Savings Account Rates in 2019
The gradual Fed rate hikes this year may not repeat in 2019. There have been signs the Fed may decide to slow down or pause rate hikes in 2019. We’ll see on Wednesday if the Fed indicates any changes for 2019.
This study has shown that in 2018, online savings account rates have responded closely to Fed rate hikes. We should see similar savings account rate hikes if we see additional Fed rate hikes. If it appears the Fed is slowing down its rate hikes, banks will likely also slow down savings account rate hikes. The added online bank competition should help put upward pressure on the rates, but the Fed and the health of the economy are the main rate drivers.
This study has also shown how much deposit rates vary. 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.