People Keep Saving Despite Low Interest Rates

Interest rates on deposit accounts are hovering at near zero percent due to the COVID-19 pandemic, but that hasn’t stopped people from socking money away.

A Federal Reserve report indicated that commercial bank deposits were up roughly $13.2 trillion at the start of the year, hitting $15.9 trillion, according to a Wall Street Journal (WSJ) report on Friday (Nov. 13).

J.P. Morgan Chase and Bank of America — among the country’s biggest banks — usually keep rates low, despite the economy. Deposit remain high for any number of reasons, from loyalty and convenience to high-end branches and innovative apps.

Digital-first banks, however, — Ally Financial and Goldman Sachs Group’s Marcus — have used attractive rates to lure new customers. But not anymore. Ally, Marcus and Capital One dropped rates to around 0.5 percent. Eight months ago, the rates were around 1.6 percent.

Bank rates typically drop when the Fed slashes short-term interest, which it did aggressively in March when the country locked down due to the pandemic. 

Big banks also have more deposits and fewer opportunities to put them to use, which is a major motivation for deposit-rate cuts this year, according to analysts cited by the WSJ.

As the pandemic triggered new deposits, requests for loans slowed, giving banks few options to earn. The research firm Novantas told the WSJ that the deposit surge came from people with less than $2,500 in the bank, who increased deposits by 66 percent through May. People with more than $5,000 in the bank only increased deposits by 1 percent. 

The government’s coronavirus relief money in the way of stimulus money and higher unemployment checks put more money in the hands of people with smaller bank accounts.

In June, people with bigger balances upped the amount of savings an average of roughly 8 percent. Comparatively, customers with lower balances averaged 2 percent more in deposits.

The Fed cut interest rates by half a percentage point on March 3, the first emergency rate cut since the Great Recession. Action by the Fed was prompted by the Dow’s biggest one-day plummet.