If the fed interest rates are rising why aren't ours?

Question

Seems like something fair would be self-explanatory, but I can't think of any reasons. Would be nice to actually get some interest on our own money!

Joe Splitrock · Answer

@Jai Reddy thanks, it appears I misread the question.

The reason savings account interest rates have not increased is that banks have an excess of money. That is mainly due to the pandemic, which resulted in massive government stimulus and payment freeze programs. On top of extra money coming in, expenses reduced because people stayed at home. They didn't go on vacation, out to concerts, to the store shopping or out to the restaurant. This left people with massive amounts of cash, which they could either spend or invest. Many put their money in the bank, which has left banks with high cash reserves. Simply put they don't need cash, so the rates reflect that. Also consider that lending rates have only recently began to increase, so there is some lag time to see all the effects. It is fair to say over time that savings interest rates will increase. For example, back in 2018 when I got a 4.5% 30 year mortgage on an investment property, I was getting close to 2% in my high yield savings. Still not very high all things considered. The Feds monetary policy makes it unlikely we will see savings account interest rates like we did in the 1980's or 1990's, when 8% to even double digits was common. As a nation we used to reward savers, but we now punish them. This is done intentionally, because spending is what makes the economy strong, so politicians want you to spend every penny you make. Strong economy means re-election.

Jai Reddy · Answer

@Joe Splitrock I think she’s asking about interest rates on her savings in the bank.

Joe Splitrock · Answer

@Celia Moore it depends on what you mean? The Fed prime rate affects the rate that lenders set for for their loan products, such as credit cards and business loans, but not directly mortgage rates. Mortgage rates are affected more by the mortgage bond market. When a bank or mortgage company issues a loan, they generally sell that loan on the secondary market. This is where Fannie Mae and Freddie Mac come into play. The pseudo government corporations set the standards for conforming loans. If the loan is conforming, it is can be purchased and bundled with other mortgages and sold as a mortgage backed security. These bonds that are backed by mortgages. During the COVID crisis, the Fed was purchasing virtually every mortgage backed security as a way to buy and hold down rates. The Fed has now started pulling out of buying these mortgage backed securities, which means the commercial market needs to buy them. They are bought by insurance companies, retirement funds and other organizations that are looking for a safe place to store money. Without Fed demand, the interest rates in the commercial market will creep higher and they have. I have seen people recently quoted 4.5% to 4.8% for 30 fixed rate on investment loans. Last year I refinanced at 2.875% with cash out at 30 year fixed.

Most banks and mortgage companies prefer conforming loans, because they make quick money originating the loan, have no servicing cost and have no risk once they sell the loan. Some banks will hold mortgages in house or selectively hold mortgages in house. They still may want the loan to be conforming, so they have flexibility to sell at a later date.

The Fed not buying mortgage backed securities doesn't mean that rates will skyrocket, but it is more based on demand, which increases as yield increases.

If the fed interest rates are rising why aren't ours?

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