Online Savings Rates Are Headed Lower

Summary

Episode Overview

Episode Title: Online Savings Rates Are Headed Lower
Podcast: WSJ Your Money Briefing
Date: September 3, 2019
Host: JR Whalen
Guest: Alison Prang, Wall Street Journal Reporter

This episode of WSJ Your Money Briefing addresses how online savings account interest rates—previously much higher than traditional bank offerings—are now declining in response to recent Federal Reserve policy changes. The discussion explores the factors behind these reductions, their impact on banks and consumers, and what savers can do to maximize their returns in a changing interest-rate environment.

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Key Discussion Points & Insights

1. Recent Economic Background

• Inflation & Consumer Spending (00:35 – 01:51):
  • Inflation in July 2019 rose slightly to 1.8%, still below the Federal Reserve’s 2% target.
  • Consumer spending increased by 0.6% from June to July.
  • Factors such as higher wages and declining gas prices contributed to this spending uptick.
  • Gas prices over Labor Day weekend 2019 were the lowest since 2016.
• Impact on Interest Rates:
  • Low inflation and concerns about economic slowing prompted the Fed to lower short-term interest rates in July.
  • Quote (JR Whalen, 01:13):
    "Low inflation, along with worries about slowing economic growth, was among the reasons that Fed officials voted in July to lower short-term interest rates."

2. Online Savings Rates: The Appeal and the Change

• Why Online Accounts Attracted Savers (02:29 – 02:53):

  • Online savings accounts offered significantly higher rates (often above 2%) compared to traditional banks.
  • Quote (Alison Prang, 02:29):
    "It's way more attractive for a lot of consumers. I would imagine anyone who has money put away to be earning something northwards of 2% as opposed to, you know, if your typical savings account at a bank is a lot, lot, lot lower than that."

• Notable Products and Recent Reductions (02:53 – 03:19):

  • Marcus by Goldman Sachs and similar online banks provided top interest rates for a period.
  • Rates have recently dipped: Marcus, for example, went from 2.25% to 2.15%, then to 2%.
  • Quote (Alison Prang, 03:19):
    "Now a couple of times they were at 2.25% and they dropped it about 10 basis points so to 2.15%. And now most recently they said it's, you know, 2%. So that's even a more sizable drop than the previous one."

3. Banks’ Response to the Fed and Their Business Strategy

• Proactive Rate Adjustments (03:35 – 03:49):

  • Some banks began lowering rates in anticipation of the Fed’s official decision.
  • Both Marcus by Goldman Sachs and Ally made downward moves ahead of formal Fed actions.

• Profitability and Deposit Strategy (03:49 – 04:36):

  • Paying out high interest affects bank profitability—especially when loan interest income drops.

  • Banks must balance attracting new (often younger) customers with offering competitive rates versus protecting their profit margins.

  • Quote (Alison Prang, 03:49):
    "The more money you have to pay out in interest, it's pressuring your profits, you know, and especially in a lower interest rate environment, banks are bringing in less money from off interest from loans."

  • Quote (Alison Prang, 04:36):
    "...to bring in a new consumer, you want to have a really good interest rate or a top rate to be the eye grabbing rate that people want to jump and throw their money in or move their money in from another account."

4. The Fed’s Influence on Everyday Savers

• Real-World Impact of Federal Reserve Actions (05:09 – 05:34):
  • Though Federal Reserve decisions may seem distant or abstract, they have a direct impact on what individuals earn in their savings accounts.
  • Quote (Alison Prang, 05:19):
    "Something like the Federal Reserve sounds pretty wonky and vague to someone, but this is a way that it really does impact your average person's life."

5. What Savers Can Do Right Now

• Still-Competitive Accounts Exist (05:34 – 06:05):
  • Savers willing to research can still find online accounts yielding over 2%, though options may dwindle as banks respond to central bank policies.
  • Requirements (like minimum balances) may apply.
  • Quote (Alison Prang, 05:43):
    "There's a number of accounts that offer more than 2%, you know, high yield savings accounts that offer that. So definitely it's, you know, like we'll see what the banks do as and we'll see what the Fed does."

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Notable Quotes & Memorable Moments

• Alison Prang on the changing landscape:
  "For a bank, it's a game you have to play." (04:36)

• On staying vigilant as a consumer:
  "A little bit of research by savers can actually work out for them." (JR Whalen, 05:34)

• On the direct impact of economic policy:
  "This is a way that [Federal Reserve policy] really does impact your average person's life." (Alison Prang, 05:19)

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Timestamps of Important Segments

• 01:13: Fed’s July decision to cut interest rates
• 02:29: Appeal of online savings rates for consumers
• 03:19: Recent rate reductions (Marcus by Goldman Sachs example)
• 03:49: Banks’ early responses to Fed rate cut signals
• 04:36: Tension between customer acquisition and profit
• 05:19: How Fed actions affect everyday savers
• 05:43: Availability of higher-yield accounts and research tips

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Conclusion

Despite recent declines, online savings accounts remain more lucrative than traditional ones—if consumers do their homework. Banks, meanwhile, are balancing competitive offers with the realities of a falling-rate environment and profit margin pressures. The episode emphasizes that Federal Reserve decisions, while abstract, directly impact everyday finances, and that vigilance remains key for savers wanting the best returns.

Transcript

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[B]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. While interest rates on traditional savings accounts have languished close to zero, online savings accounts have been offering much higher rates. But what goes up is now coming down. We'll have details in a moment. First, some money and market news you should know. Inflation in the US inched up about a quarter percentage point in July. And the as consumer spending remains strong, that puts inflation at 1.8% according to the Commerce Department, still below 2% where the federal Reserve sees as a healthy level. You recall that low inflation, along with worries about slowing economic growth, was among the reasons that Fed officials voted in July to lower short term interest rates. Many economists believe the country's low unemployment rate, coupled with rising wages and strong consumer spending will eventually push inflation above the key 2% level. And in July, consumers were indeed in a buying mood. Spending was up 0.6% from June and higher than May as well. Wages and salaries edging higher played a role, but so did the steady decline of gas prices. As of Labor Day weekend, the average price of a gallon of unleaded gas had fallen six straight weeks to $2.58. That's down about 30 cents from a year ago and the lowest price at Labor Day since 2016. For about the last 10 years, it hasn't been easy making much money off of interest in traditional bank savings accounts. But online savings accounts offered very attractive rates. While recent actions by the Federal Reserve are changing that scenario, let's bring in Wall Street Journal reporter Alison Prang to run some numbers for us. So Alison, banks have been reducing the interest paid on their online savings accounts for several months. It wasn't as if people were getting rich off the interest, but the rates were higher than the rest of the industry.

[C]

Oh, definitely, yeah. It's way more attractive for a lot of consumers. I would imagine anyone who has money put away to be earning something northwards of 2% as opposed to, you know, if your typical savings account at a bank is a lot, lot, lot lower than that. So these, these are attractive options for a lot of people and still are

[B]

even in this environment, the Marcus online savings product owned by Goldman had one of the highest rates around for a

[C]

long time they were one of them. There's a lot actually there's a number that pay above 2%. Marcus I feel like has been a really well known option being Goldman Sachs. And you know what? Not that people have used, but for sure there's a number of them that you can get this higher interest rate at. That's I would say above that, above 2% is a lot of the big

[B]

banks are offering these savings account products. The Marcus online savings product owned by Goldman Sachs had one of the highest rates around for a long time and

[C]

they just came down over the summer. Now a couple of times they were at 2.25% and they dropped it about 10 basis points so to 2.15%. And now most recently they said it's you know, 2%. So that's even a more sizable drop than the previous one.

[B]

The online rate reduction has been going on like you said, for a couple of months. What I thought was interesting is that some banks responded earlier in the year to just signals put out by the Fed before the Fed actually went ahead and pulled the trigger and lowered short term rates.

[C]

Exactly. We wrote a story about that looking at when the Marcus rate was cut by Goldman and then also Ally had the same situation. And yeah, if you're a bank, I mean the more money you have to pay out in interest, it's pressuring your profits, you know, and especially in a lower interest rate environment, banks are bringing in less money from off interest from loans. So to protect, you know, your company's earnings, you want to, you want to cut back on costs and that cost is one, you know, they kind of ebb and flow together.

[B]

Well, there's a delicate balance here because one of the intents behind the big banks launching these saving accounts was to attract younger people to put money away and over time stay with the bank as they made more money, invest further, whether it be with more cash or stocks or mortgages and what have you and just build up a brand awareness. But wouldn't lowering the rates start to erode that goal?

[C]

That's a really good question for banks. Like I said, it pressures their profits. But yeah, to bring in a new consumer, you want to have a really good interest rate or a top rate to be the eye grabbing rate that people want to jump and throw their money in or move their money in from another account. So totally you have to very much play with, you know, as a bank, do you need Deposits, you know, should you pay up because you need a lot of deposits. Should you pay more interest to attract more people or do you have a little more flexibility? You know, can you save money and lower your rate, still bring some people in, you know, but also, also save on costs. So for a bank, it's a game you have to play.

[B]

All the talk about the Fed and interest rates can be sort of a blizzard of numbers and it's a lot of thick financial language. But here's an example of how actions by the Fed could actually hit home.

[C]

No, that's a great point. It's a hugely great point. Exactly. You know, we know things like our bank account people. Sure, a ton of people check their bank account every day. And something like the Federal Reserve sounds pretty wonky and vague to someone, but this is a way that it really does impact your average person's life.

[B]

There are still comparatively decent savings rates out there and some require a minimum deposit or minimum balance. But a little bit of research by savers can actually work out for them.

[C]

Oh, totally. Yeah. You can definitely see, like I said before, there's a number of accounts that offer more than 2%, you know, high yield savings accounts that offer that. So definitely it's, you know, like we'll see what the banks do as and we'll see what the Fed does. That will also depend on what the banks do. Those things are linked. You know, the banks are going to look out for what the Fed's planning on doing in terms of the flexibility they have with cutting their rates.

[B]

All right, that's Wall Street Journal reporter Alison Prang here in our studio. Alison, thanks for coming on the show.

[C]

Thanks so much.

[B]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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