Waiting For Higher Bank Deposit Interest? Don't Hold Your Breath

While good deals are available, average CD rates have risen at a glacial pace

By
Diccon Hyatt
Diccon Hyatt
Full Bio
Diccon Hyatt is an experienced financial and economics reporter who has covered the pandemic-era economy in hundreds of stories over the past two years. He's written hundreds of stories breaking down complex financial topics in plainspoken language, emphasizing the impact that economic currents would have on individuals' finances and the market. He's also worked at The Balance, U.S. 1, Community News Service and the Middletown Transcript.
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Published April 07, 2023
It's possible that banks are counting on retail depositors to be 'less sophisticated' than investors, the New York Fed researchers said.

Alice Morgan/Investopedia

One upside for consumers as interest rates surged in the past year should be that your bank will pay you more interest on the money you deposit. Maybe not so much.

At least not for a while, according to research this week from the Federal Reserve Bank of New York. Its report showed banks are slow to offer higher rates to retail customers and are getting slower. 

Between March 2022 and March 2023, the effective federal funds rate—the rate at which banks lend money to one another—rose to 4.65% from near zero, as the Fed pursued its campaign of anti-inflation rate hikes. Yields that banks paid to investors in money market funds tracked the fed funds rate, rising by almost as much. Yet average rates banks offered to retail customers on three-month certificates of deposit have barely budged, the Fed’s analysis showed. 

It is possible to find good deals on CDs and high-yield savings accounts with a little research. On average, though, CD rates are typically in no hurry to catch up to the fed funds rate, and have gotten slower over the past 20 years, previous research by the New York Fed has shown, while money market funds offered to investors have kept pace. 

It’s possible that banks are counting on retail depositors to be “less sophisticated” than professional investors, the New York Fed researchers said.

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  1. Federal Reserve Bank of New York. "Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update."

  2. Federal Reserve. "Effective Federal Funds Rate."

  3. Federal Reserve. "How Do Deposit Rates Respond to Monetary Policy?"

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