Since 14th Dec 2017, the Federal Reserve Bank has paid 1.50% interest on excess reserves.
So why do depositors' interest rates still remain so low? According to BankRate, across the US, the national average savings account interest rate is 0.09% and only a handful of banks offer 1.50% or more.
The Econ 101 story would go something like this:
If Bank A offers 1% and Bank B offers 1.3%, then consumers will move all their savings to Bank B. Bank A will then compete by raising its rate to 1.31%, which is still profitable since it can deposit its money at the Fed for 1.50%. Bank B will then raise to 1.32%, etc. Competition will ensure that the interest rate is driven up towards 1.50%.
I imagine there are some transaction and administrative costs, but I don't see how these could explain the huge gap between the national average savings interest rate (0.09%) and the interest rate paid by the Fed to banks (1.50%). I do believe also that there is no limit to the reserves that banks can place with the Fed (though please correct me if I'm mistaken on this point).
What am I missing here? Or: Why does this market deviate markedly from the perfectly competitive ideal?
Some possible general explanations off the top of my head (but I suspect there may be other more specific institutional factors that I'm not aware of):
- Consumer ignorance. (Similar to this recent working paper which documents that people fail to pay off those credit card debts that charge the highest interest, and instead adopt some sub-optimal "balance-matching" heuristic.)
- Consumers face transaction/psychic costs moving their money about, setting up new accounts.
- Banks offer other services, so consumers may still prefer to save with a bank despite its lower interest rate.
- Menu costs - it's somehow costly or maybe bad publicity to frequently change the bank's savings rate.