Fed’s Powell raises interest rates to 5%

Federal Reserve Chairman Jerome Powell raised interest rates to 5%, the highest level they've been in almost a generation.

You wouldn't know it to look at the interest rates on a typical bank account.

Read: Very unclear Powell's press conference provided more questions than answers. The average one-year Certificate of Deposit from a federally insured bank is just 1.49%, according to the FDIC.

The average savings account has an interest of just 0.37%.

The same institution taking your money and paying you this little can just turn around and deposit it at the Fed for an overnight rate of 4.9%, with zero risk.

They are not as expensive as you can get from shopping around. They are currently less than inflation, which means that the people holding their money in these accounts are going backwards and not forwards financially.

Deposit rates typically move in the same direction as the Federal ReserveFederal Reserve's benchmark lending rate, but often with a lag, said Sayee Srinivasan, chief economist of the American Bankers Association, said that bank rates can be expected to move higher if the Fed continues to raise interest rates. Rates have been rising for a year. The effective fed-funds rate was already above 2% last August and 4% by December. Many depositors are still getting interest rates that are little better than zero.

Bank rates are set in a highly competitive market, and banks will continue to compete for customers on fees, products and services, and innovation, according to Srinivasan.

The banks won't compete if we don't force them.

They can get away with this kind of thing because of customer inertia and ignorance. How many people know what interest rate they are currently getting on their savings account? When a busy schedule is busy, someone finds time to check or do something about it?

Most people probably have dozens of more urgent priorities on any given day. We can get to tomorrow, because it's something we can get to.

We've been lulled by a generation of ultra low interest rates and not to care too much anyway.

Not so great for us.

The banks got flooded with deposits during the Covid crisis as people collected stimulus checks, canceled spending plans and stayed at home. One of the problems for savers is that they were flooded with deposits. The total deposits rose by nearly $5 trillion, or 35%, during the first two years of the crisis, and have been slowly coming down over the past year. The banks don't really need our money.

There are now better deals out there for those with the time and energy to take advantage of the Fed raising interest rates. Savings accounts pay 4%, according to Bankrate. CDs from one year are available for $5.3%, available through your broker. Why do I keep money at a checking account paying 0.06% when I get a money-market account with check writing privileges, now paying 4.5% or better?

Banks take advantage of those who don't shop around.