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Pathetic Savings Account Rates the New Normal

Savers can't get break! Since the financial crisis and the recession savings account rates have been pathetic. Savings rates will continue to be pathetic until at least the end of 2014 since the Federal Open Market Committee (FOMC) plans to keep the Fed funds rate in a targeted range of zero percent to one quarter percent.

The very highest savings rates and money market rates are barely just above 1.00 percent these days. The highest CD rates on 5 year certificates of deposit are just above 2.00 percent. If you have a mortgage you made out like a bandit if you were able to refinance your loan recently. I refinanced this year and found 15 year refinance rates just above 3.00 percent.

Younger Americans have benefited more from record low interest rates than older Americans. Those just starting out in life owning a home more than likely have a large mortgage and less of a savings.

Where as older Americans are in the opposite position, probably have very little left on a mortgage loan or no mortgage at all, and have a majority of their savings in less risk lower yielding accounts like savings accounts or certificates of deposit.

The Fed isn't the only reason why deposit rates are so low. Banks have enough deposits on hand and are not lending as much money as they have been in the past.

The U.S. personal savings rate as percentage of disposable personal income rose to 3.9 percent in May, up from 3.7 percent in April according to the U.S. Department of Commerce's Personal Income and Outlays for May 2012.

Here is a comparison of Personal Saving in the National Income and Products Accounts with Personal Saving in the Flow of Funds Accounts:

A higher savings rate along with new credit card regulations and consumer debt falling since the financial crisis is also creating less of a demand for deposits and forcing interest rates lower.

The Fed's Household Debt Service Ratio (DSR), an estimate of the ratio of debt payments to disposable personal income, is down to 10.98 percent in the first quarter of 2012. This is the 13th consecutive quarter the ratio is lower and down from a high of 14.08 percent in the third quarter of 2007. 

A slow growing economy which can't seem to get it's legs will keep interest rates low for the foreseeable future. Every quarter we seem to be turning the corner for more robust growth and something comes a long to take the wind out of our economic sails. Until growth starts' roaring back and inflation becomes a concern interest rates will remain at pathetic low levels, just think about the "Lost Decade" in Japan.
Author: Brian McKay
July 3rd, 2012