Oct 09, 2018

Chart of the Week: How do banks react to increases in interest rates? (Hint: You don't want to be a borrower!)

I have noted this trend before but to see it all on one graph makes it even more powerful. As the Federal Reserve has increased the Federal Funds rate target, the cost of borrowing has risen in lockstep while interest earned from savings accounts still hovers close to zero. In other words, costs to borrow typically have variable rates which automatically adjust upwards in a rising interest rate environment while interest on savings accounts are extremely slow to adjust upwards as banks seek to protect their profit margins. The one exception is online banks who continue to offer the best rates for savers. 

Questions:

  • How does the average interest rate PAID by consumers with credit card debt compare with interest EARNED by savers with savings accounts? 
  • As the Fed Funds rate target has inched upward since 2016, how have rates for credit cards changed? interest rates on savings accounts? 
  • Banks typically make money based on the spread between the money they loan out (interest earned on credit card debt or home loans) and they money they borrow (interest they pay on savings accounts). What do you think has happened to their profits since 2016? 
  • Why do you think that banks have been so slow on increasing the interest rates they pay for savings accounts? 

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Looking for more charts for your students to analyze? Be sure to check out NGPF's Data Crunches!

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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