Savings Accounts and the Fed

Savings Accounts and The Fed

In the 1950’s interest rates rested between 1 and 2% in returns for the average savings account. Gradually, interest rates climbed and sometimes fell until the 1980’s were rates peaked at about 19%. This was due to the gradual climb of inflation. Between then and today, rates have steadily fallen to rates that we love to hate.

Today’s banks pride themselves in offering meager returns of 0 to maybe 1%. The latter being an account that you must keep a minimum balance of hundreds of thousands of dollars. This is a return that most of cannot achieve. If you are in the former category, as I am, you might just have a difficult time keeping the minimum balance required to wave the account fees. In which case, the bank charges me for the privilege of holding and investing my money so they may make a profit.

So, who gets to decide what the interest rates will be? The Federal Open Market Committee or FOMC is the culprit responsible. FOMC consists of The Federal Reserve Board and five Federal Reserve Bank presidents. (www.investopedia.com) This committee monitors, and controls the Federal Reserve System affectionately known as “the Fed”. The Fed is what is known as a Central Bank whose main responsibility is to supervise and regulate retail banks. Among other duties, the Fed must create and implement monetary policy by buying and selling U.S. Treasury bonds and steer interest rates. (www.investopedia.com)

The Fed sets the starting point for interest rates by setting the base interest rate. This is the rate charged to commercial banks to borrow money from the reserve overnight. Presently the Fed rate is near zero. The banks then respond by paying very low interest rates to depositors. The Fed does this to help keep economic equilibrium. Low interest rates help prevent or pull the economy out of recession. If the Fed notices too much activity in the market it can introduce higher interest rates to slow it down, also...