The Interest That Banks and Savings and Loans
For decades, the interest that banks and savings and loans could pay on checking and savings accounts was regulated by the federal government. Savings and loans could pay 51⁄2 percent on passbook accounts, while banks could pay a maximum of 51⁄4 percent. The soaring inflation and interest rates of the late 1970s rendered those fixed rates obsolete, ushering in the era of bank deregulation.
Ever since the banking industry was fully deregulated in the early 1980s, banks and savings and loans have been free to pay as much as they choose on checking and savings accounts. A bank that wants to generate a large amount of deposits to make loans will offer higher interest rates than a bank that does not anticipate much loan demand.
Though there are variations from bank to bank, the yields you earn on your cash are affected more by the general movement in interest rates than by individual banks themselves. If inflation is high and rising and the Federal Reserve pushes up interest rates to try to cool off the economy, cash instruments will pay rates from 8 percent to as much as 20 percent, as they did in the early 1980s. Under these circumstances, which persisted in the 1990s and 2000s, yields on cash can fall dramatically to as low as 2 percent.
