Have savings account interest rates peaked?
Fed rate hikes may soon wind down. How will that affect your savings?
PHNjcmlwdCB0eXBlPSJ0ZXh0L2phdmFzY3JpcHQiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlX3ZpZXdwb3J0X2RldGVjdGlvbi5qcyI+PC9zY3JpcHQ+PHNjcmlwdCBhc3luYyB0eXBlPSJ0ZXh0L2phdmFzY3JpcHQiPm15ZmlXYXRjaFdpZGdldCgnbXlmaVdpZGdldF8wJyk7PC9zY3JpcHQ+Jean Folger is a freelance writer and editor with a knack for tackling complex subjects using simple language. She’s passionate about helping people make better financial choices so they have more money and time to spend on the things that matter most. In her 15+ years as a freelance writer and editor, she’s specialized in real estate, retirement, investing, and other personal finance topics. Jean has written extensively for SFGate, Business Insider, The Motley Fool, Opendoor, Prudential, Investopedia, and more. She co-founded PowerZone Trading, which has provided award-winning software, consulting, and strategy development services to active traders and investors since 2004. Jean graduated with a bachelor's degree from Ohio University. Previously, Jean was a licensed real estate broker, an English teacher, and an adventure travel trip leader. And, she’s also the proud parent of a Team USA Olympic athlete.Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.Mobile app users, click here for the best viewing experience.The Federal Reserve raised its federal funds target rate another quarter of a percentage point on May 3 in its bid to cool inflation. The move marks the 10th consecutive Fed rate hike since March 2022, bringing the benchmark interest rate to its highest level in 16 years. Higher interest rates translate to more expensive loans and credit for businesses and consumers. Still, there’s a silver lining: Savings account interest rates are the best in years, allowing savers to cash in.TIP: The federal funds rate is the rate banks charge one another for overnight loans. The Fed may lower rates to stimulate the economy or raise rates to tamp down on inflation. As the rate increases, borrowing costs for consumers and businesses also go up. Why are high-yield savings account interest rates so high?The Fed began aggressively raising rates in March 2022 (the first increase since 2018) to address spiraling inflation without plunging the U.S. into recession. Since then, rates have steadily climbed, with Wednesday’s hike capping the fastest series of rate increases since the 1980s. Here’s what happened with the Fed rate hikes over the past 15 months: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While the rate hikes make borrowing more expensive and often more difficult, they benefit savers. Savings account interest rates have climbed steadily along with the Fed’s rate hikes — from an average of 0.06% in early 2022 to 0.37% today (and it’s possible to earn much more than that).What else influences high-yield savings account interest rates?The Fed’s monetary policy decisions aren’t the only force behind interest rates. Macroeconomic conditions come into play, as does competition among financial institutions — and some banks have been less generous about passing higher rates on to savers. For example, large brick-and-mortar banks like Bank of America and Chase still pay around 0.01% APY. At the same time, many online banks offer APYs of more than 4% — about 400 times more — in high-yield savings accounts. Rates on certificates of deposit (CDs) are also excellent right now, with the top-yielding accounts offering an APY of 5% or more.Will rates continue to rise in 2023?The Fed has yet to decide whether to pause its rate hikes. At a news conference following Wednesday’s meeting, Fed Chair Jerome Powell left the door open, saying that “future policy actions will depend on how events unfold.” Powell also indicated the committee would consider the cumulative tightening of monetary policy, along with economic and financial developments, to determine “the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time.”In its most recent statement, the Fed removed a sentence saying it anticipates further rate increases would be needed — a change that Powell said is “meaningful.” He added, however, that the committee is “prepared to do more if greater monetary policy restraint is warranted.”What should savers do?According to a Bankrate survey, only about 20% of savers (Americans with short-term savings) have savings accounts earning a competitive rate of 3% or higher — and nearly a quarter (24%) earn less than 1%. That means most savers could earn much higher rates (and much more interest) by moving their cash into a high-yield online savings account.Keep in mind that the average savings account interest rate is still just 0.37%. So, using a $10,000 deposit as an example, the account would grow to $10,037 after one year (i.e., you’d earn $37 in interest). But the same deposit in a high-yield savings account with a 4% APY would grow to $10,400 during the same period. And rates are likely to increase even further following the Fed’s most recent quarter-percentage point rate hike.Of course, savings account APYs are variable, so the rate can drop if the Fed lowers interest rates (though nobody can predict when that will happen). To take advantage of today’s high rates for longer, consider a CD. These time deposit accounts often pay more than high-yield savings accounts and let you lock in a rate for several months to several years (or more). The only catch is that early withdrawal penalties apply, so CDs are best for cash you won’t need immediately.The Bottom LineWhile the Fed has indicated it may suspend its rate hikes, some experts believe at least one more is on the horizon. Either way, interest rates are the highest in years — and savers can cash in by putting their money in a high-yield savings account or CD.Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.
Jean Folger is a freelance writer and editor with a knack for tackling complex subjects using simple language. She’s passionate about helping people make better financial choices so they have more money and time to spend on the things that matter most. In her 15+ years as a freelance writer and editor, she’s specialized in real estate, retirement, investing, and other personal finance topics. Jean has written extensively for SFGate, Business Insider, The Motley Fool, Opendoor, Prudential, Investopedia, and more. She co-founded PowerZone Trading, which has provided award-winning software, consulting, and strategy development services to active traders and investors since 2004. Jean graduated with a bachelor's degree from Ohio University. Previously, Jean was a licensed real estate broker, an English teacher, and an adventure travel trip leader. And, she’s also the proud parent of a Team USA Olympic athlete.
Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.
Mobile app users, click here for the best viewing experience.
The Federal Reserve raised its federal funds target rate another quarter of a percentage point on May 3 in its bid to cool inflation. The move marks the 10th consecutive Fed rate hike since March 2022, bringing the benchmark interest rate to its highest level in 16 years. Higher interest rates translate to more expensive loans and credit for businesses and consumers. Still, there’s a silver lining: Savings account interest rates are the best in years, allowing savers to cash in.
TIP: The federal funds rate is the rate banks charge one another for overnight loans. The Fed may lower rates to stimulate the economy or raise rates to tamp down on inflation. As the rate increases, borrowing costs for consumers and businesses also go up.
The Fed began aggressively raising rates in March 2022 (the first increase since 2018) to address spiraling inflation without plunging the U.S. into recession. Since then, rates have steadily climbed, with Wednesday’s hike capping the fastest series of rate increases since the 1980s. Here’s what happened with the Fed rate hikes over the past 15 months:
While the rate hikes make borrowing more expensive and often more difficult, they benefit savers. Savings account interest rates have climbed steadily along with the Fed’s rate hikes — from an average of 0.06% in early 2022 to 0.37% today (and it’s possible to earn much more than that).
The Fed’s monetary policy decisions aren’t the only force behind interest rates. Macroeconomic conditions come into play, as does competition among financial institutions — and some banks have been less generous about passing higher rates on to savers. For example, large brick-and-mortar banks like Bank of America and Chase still pay around 0.01% APY. At the same time, many online banks offer APYs of more than 4% — about 400 times more — in high-yield savings accounts. Rates on certificates of deposit (CDs) are also excellent right now, with the top-yielding accounts offering an APY of 5% or more.
The Fed has yet to decide whether to pause its rate hikes. At a news conference following Wednesday’s meeting, Fed Chair Jerome Powell left the door open, saying that “future policy actions will depend on how events unfold.” Powell also indicated the committee would consider the cumulative tightening of monetary policy, along with economic and financial developments, to determine “the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time.”
In its most recent statement, the Fed removed a sentence saying it anticipates further rate increases would be needed — a change that Powell said is “meaningful.” He added, however, that the committee is “prepared to do more if greater monetary policy restraint is warranted.”
According to a Bankrate survey, only about 20% of savers (Americans with short-term savings) have savings accounts earning a competitive rate of 3% or higher — and nearly a quarter (24%) earn less than 1%. That means most savers could earn much higher rates (and much more interest) by moving their cash into a high-yield online savings account.
Keep in mind that the average savings account interest rate is still just 0.37%. So, using a $10,000 deposit as an example, the account would grow to $10,037 after one year (i.e., you’d earn $37 in interest). But the same deposit in a high-yield savings account with a 4% APY would grow to $10,400 during the same period. And rates are likely to increase even further following the Fed’s most recent quarter-percentage point rate hike.
Of course, savings account APYs are variable, so the rate can drop if the Fed lowers interest rates (though nobody can predict when that will happen). To take advantage of today’s high rates for longer, consider a CD. These time deposit accounts often pay more than high-yield savings accounts and let you lock in a rate for several months to several years (or more). The only catch is that early withdrawal penalties apply, so CDs are best for cash you won’t need immediately.
While the Fed has indicated it may suspend its rate hikes, some experts believe at least one more is on the horizon. Either way, interest rates are the highest in years — and savers can cash in by putting their money in a high-yield savings account or CD.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.