Why are mortgage rates up but interest on your savings isn’t?

Why are you getting virtually no interest on your savings?

After all, mortgage interest rates are nearly twice as high as they were at the start of the year, thanks largely to the Federal Reserve’s decisions this year to increase its key rates.

Yet the interest you’re getting on your CDs and other accounts could barely be more than one-fourth of 1%.

What’s going on here?

“The rates of CDs and other bank accounts reflected the costs of banks’ operations while the loan rates reflected banks’ revenues.

To maximize their profits, banks would raise loan rates quickly and CD rates slowly,” said Tenpao Lee, professor emeritus at Niagara University in New York.

DespositAccounts.com estimated that the average one-year certificate of deposit last Tuesday was offering a 0.68% annual percentage yield.

Shop around, it said, and you could find a 3.21% APY with a $5,000 minimum. An online bank was offering a 13-month CD with a $500 minimum at 3.1% APY. For a smaller deposit, the highest APY was 2.7%..

DepositAccounts found money market APYs averaging 0.22%, but as high as 2.6% with a $2,500 minimum at an online bank. Best APY for a balance below $1,000 was 2.5%.

Most personal savings account rates at local bank branches in the Sacramento-Stockton-Modesto area tend to be under .05%.

The slow chug on savings rates is nothing new.

“Savings rates will never go up as much as what the Fed has raised overnight rates to,” said Anthony Valeri, the director of investment management at California Bank and Trust.

All the rates are far below mortgage interest rates, which for a 30-year fixed rate loan was 5.92% on Tuesday, according to Bankrate.com. At the start of this year, the average rate was 3.4%.

Underlying the increase are the Fed’s interest rate actions. It’s increasing its federal funds rate, its key rate, in an effort to bring down inflation. There have been four increases this year, starting near zero and now in the 2.25% to 2.5% range. The next increase is expected in late September.

That should mean higher rates for savers, said the experts, though it’s unlikely they’ll come close to matching lending rates.

“They’re lagging more than in the past,” said Ken Tumin, founder and editor of DepositAccounts.comOne big reason is that banks have less than usual need for deposits.

During the COVID-19 pandemic, people tended to save more of their money, so even today, banks don’t always need to woo people to deposit more funds by offering bigger interest rates.

Another reason: “Loan rates have gone up faster than deposit rates so banks can see some recovery in their margins,” said Greg McBride, chief financial analyst at Bankrate.

The good news is that savings rates will climb.

“Savings rates are going up, if you look in the right place. Smaller banks and online banks that are eager for more deposits have been raising their payouts and this has gained momentum as the Federal Reserve has been raising interest rates,” McBride said.Lee saw savers’ rates going up a percentage point, “slowly throughout the end of the year.”

“As long as the Fed keeps hiking you’ll see savings account rates continue to rise,” Tumin said.

Valeri said rates should continue to increase through the end of this year to the beginning of 2023. What the rate will exactly be will depend on how high the Fed decides to raise overnight interest rates, he said.

If the Fed does raise interest rates to 3% to 4%, Valeri said it’s possible people can see savings rates go up to about 2%. But it’s a ballpark guess.

Tumin advised looking to the online savings offers for higher rates, since their costs tend to be lower than “brick and mortar” institutions.

Valeri recommends that you choose a bank you’re comfortable with. Some internet banks don’t offer specific services, he said, so it’s a trade off.

McBride saw promising news eventually. The rates will go up, he said, and if the Fed is successful, the rate of inflation will go down from the 8.5% annual rate reported last month.

“The Federal Reserve will continue to raise interest rates and that means a more promising outlook for savers,” he said. “Rates on the most competitive savings accounts will continue to rise, and eventually inflation will recede in a meaningful way.”