This week, the Fed elected to maintain the federal funds rate at 5.25%-5.5% after making 11 increases over the past year in order to lower stubbornly high inflation. “Recent indicators suggest that economic activity has been expanding at a solid pace,” the Federal Open Market Committee said in a statement. “Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.”
Indeed, inflation does remain somewhat elevated, having risen to 3.7% last month, according to government figures. What’s more, the Fed did not close the door on further rate hikes this year, as MarketWatch reported today: “According to the Fed’s dot-plot forecast, 12 Fed officials penciled in another 25 basis point rate hike this year, while seven projected no more more hikes.”
After all those rate hikes in the past year, savings and CD rates are already high (see some of the highest savings rates here and some of the highest CD rates here.) Now, the big question on many savers’ minds is what this all might mean for savings rates going forward?
So what does rising inflation and a relatively high benchmark funds rate have to do with savings accounts and CDs? For one, the higher the central bank raises interest rates, the more it costs banks and credit unions to pay off their own debt.
That, in turn, prompts many of the — often small or online-only — financial institutions to raise their rates for savings products. This then brings in new customers, who are drawn by the higher potential to earn, and also allows these financial institutions to raise cash to pay off their debt and balance their own books in the process.
“We don’t have a crystal ball, but pros say that as for any future increases, those will be determined, at least in part, by the unpredictable federal funds rate (the target interest rate set by the Fed). When there are Fed rate hikes, CDs may offer higher APYs” as might high-yield savings accounts,” MarketWatch Picks recently reported.
And Greg McBride, chief financial analyst at Bankrate, says many savers are currently earning returns that beat inflation. That is, “if the money is in the right place, such as an online savings account,” he wrote in a statement Wednesday. “Whether the Fed does or doesn’t raise rates further in the coming months, the high rates are here to stay for a while,” McBride adds. (See some of the highest savings account rates you can get here.)
Of course, it’s not a definite that rates will rise. Nicholas Bunio, a certified financial planner at Retirement Wealth Advisors, explains that if inflation comes back down and interest rates go lower, “savings and CDs will readjust to a lower rate.” And “if prices stabilize — not decline — and rates pause, that would mean savings accounts and CDs also would not likely increase,” he says.
To be sure, savings rates for both high-yield savings accounts and CDs have experienced significant increases over the past year. For savings accounts, the latest data from the Federal Deposit Insurance Corporation, or FDIC, show the average national deposit rate reached 0.45% as of Sept. 18. Last year, the average rate for savings accounts was just 0.17%, data show.
And while this is indeed a large year-over-year increase, account offerings from often smaller, or online-only banks and credit unions are often well in excess of the national average in order to compete with their larger competition and raise cash to both balance their books and pay off their own rising debt in the process. Here are just some of the best offers right now (read the full ranking of top rates for high-yield savings accounts here).
The story is also quite similar when it comes to CDs. The average national deposit rate for 12-month CDs, meanwhile has reached 1.76%, according to FDIC data. Just one year ago, however, the average 12-month CD carried a rate of 0.60%. And just like with high-yield savings accounts, many banks and credit unions are offering rates well in excess of the national average. Here are the three highest earning accounts right now (read the full ranking of CDs with the best rates here).
- Alpena Alcona Area Credit Union: 7.19% APY for a 7-month CD
- American Eagle Financial Credit Union: 6.00% APY for a 6-month CD
- Truliant: 6.25% APY for an 11-month certificate
Fed holds rates steady, but hints at another hike to come. What might happen to savings and CD rates in 2023?