What rate of interest can you expect to get on a savings account? Prior to the Great Recession, savings account interest rates offered by banks could typically be found in the 4% to 8% range, depending on the inflation in the economy. Since that time, the Federal Reserve has undertaken unprecedented steps toward creating a low interest rate environment. The average return on savings accounts had fallen to 0.06% annual percentage yield by October 2013. By February 2020 interest rates for the highest-yield savings accounts had crept back up to 2.20%.

In economic parlance, the interest rate that banks quote is known as the nominal rate. That is different from the real rate of return depositors receive.

Interest rates can be expressed in two ways: as nominal rates or real rates. The difference is that nominal rates are not adjusted for inflation, while real rates are adjusted. 

When adjusted for inflation, the real rate of return offered by today's savings accounts is often negative. This has put many savers in a quandary, forcing them to decide between losing liquidity and security or losing purchasing power with their savings.

How Savings Account Rates Are Determined

As a matter of principle, banks shouldn't offer a higher rate on their deposit accounts than they charge for their loans. For example, a bank would lose money if it offered 5% interest to its savings depositors but only charged 3% interest on its mortgage and car loans.

Banks can't just raise the rates that they offer on their loans to whatever rate they want; they'd lose out to competitor banks or other investment providers.

Savings account interest rates are chronically below 1% because the Federal Reserve offers to lend money to banks through its discount window. Banks can lend to each other at the interest level dictated by the federal funds rate. When both the federal funds rate and the discount rate are set below 1%, it wouldn't make any sense for a bank to pay more than that to receive money from private depositors.

The Real Rate of Return

Don't just focus on the stated interest rate on your savings account to see how much it pays. Even if the rate on your savings account goes up by 5% next year, you might still be worse off if the inflation rate goes up by 7% over the same period. Focus on the real rate of return to see how the purchasing power of your savings changes over time. The nominal rate is just window dressing.

You can learn more about the best high-yield savings accounts and where you might feel safest when deciding where to bank. It pays to remember, though, that if you opt for opening a savings account with one of the high-yield banks or credit unions, you might lose the convenience of being able to maintain a linked checking account with that bank and may be subject to lower actual interest rates should your savings balance fall below certain prescribed levels.

An additional problem with the real rate of return is that you can't be sure of what it is exactly until it has already been computed. The reason for that is because inflation is a "trailing factor" and can only be calculated after a relevant period is over. Additionally, the real rate of return is not entirely accurate until you factor in other costs, especially taxes and any pertinent applicable investing fees.