Fed interest rate hike: Will savings account rates rise?
When the federal funds rate goes up, savings rates tend to increase, too. Hereâs whatâs likely to happen next.
When the federal funds rate goes up, savings rates tend to increase, too. Hereâs whatâs likely to happen next.
When the federal funds rate goes up, savings rates tend to increase, too. Hereâs whatâs likely to happen next.
Lauren Williamson is the Financial and Home Services Editor for the Hearst E-Commerce team. She previously served as Senior Editor at Chicago magazine, where she led coverage of real estate and business, and before that reported on regulatory law and financial reform for a magazine geared toward in-house attorneys. You can reach her at lauren.williamson@hearst.com.
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The Federal Reserve by a quarter point on May 3, meeting widespread predictions and bringing the federal funds rate to its highest level since the summer of 2007. This increase brings the federal funds rate, which is how much it costs banks to borrow from one another, to between 5.0% and 5.25%.
Itâs the tenth consecutive increase since the Fed started its historically aggressive series of rate hikes in March 2022 as a means of reeling in inflation. At the peak, the Fed raised interest rates by 0.75 percentage points four times in a row. The last three hikes have all been a quarter point, a sign that the Fed believes its efforts are working.
While the Fed didn't explicitly say the streak of rate hikes is ending, the statement accompanying the announcement suggested a pause could be forthcoming. "The Committee will closely monitor incoming information and assess the implications for monetary policy," the Federal Open Market Committee (FOMC) said. "In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
Fed Chair Jerome Powell said in a press conference that a "decision on a pause was not made today." However, he pointed out that a change in language between the March and April FOMC policy statements was "meaningful." In March, the FOMC said, "The Committee anticipates that some additional policy firming may be appropriate." That sentence, Powell noted, is no longer in the statement.
The Fed has never raised the federal funds rate by so much in such a short period of time. Itâs created a rough environment for borrowers, since interest rates on services like loans and mortgages tend to rise along with the federal funds rate (even though the Fed doesnât set the rates lenders charge consumers). , for one, hit 20-year peaks in the fall and approached them again in March.
Amid the bad news for borrowers, however, there has been excellent news for savers: are the highest theyâve been since the mid-2000s. The average rate for savings accounts was 0.24% as of April 24 survey. Thatâs four times what it was when the Fed started raising rates.
However, if youâre willing to shop around, your money can do significantly better than that. Some are offering interest rates upwards of 5%, so it pays (literally) to consider your options.
Hereâs what to know about how the and how you can take advantage of the best interest rates in recent memory.
How does the Federal Reserve affect savings account interest rates?
Just as the Fed doesnât control interest rates on , it doesnât set rates for savings accounts, either. But its actions certainly have an effect on them.
At a high level, the federal funds rate is the interest rate banks charge to borrow from one another overnight. When the Fed raises that rate, the cost to banks goes up. Banks then try to attract more customers by raising interest rates on deposits into savings accounts and CDs. New customers infuse the banks with funds that they can then use to lend money to other customers â and banks make most of their money from the interest paid on those loans.
If youâre looking for the greatest return right now, have been offering exponentially higher interest rates than traditional banks, in some cases as much as 20 times higher. Online banks are able to offer these excellent rates since they donât have the overhead of banks that need to maintain hundreds or thousands of brick-and-mortar locations.
Most high-yield savings accounts at online banks offer the same flexibility as traditional savings accounts, such as the ability to easily transfer money to a checking account. Theyâre also just as safe. As long as the account is with an , your money is protected up to $250,000 per depositor.
are also a good option these days for higher interest rates, especially if you can afford to leave your money in place for a while. â those that lock your money in place for a year or less â have the best returns right now, with some interest rates also reaching 5%. The benefit of CDs is that theyâll maintain that rate for the entire term, so youâll still earn a robust rate even if the market shifts.
Will the Fed continue raising interest rates?
As of the morning of the hike, on an 82.8% chance that the Fed would enact a quarter-point increase, according to CMEâs FedWatch. himself indicated that a rate hike was most likely in the cards during a private meeting with republican lawmakers at the end of March. When asked at that meeting about the probability of more increases, he pointed to the Fedâs terminal rate, which is the highest the federal funds rate is expected to go and has stayed at 5.1% throughout this inflationary cycle.
Inflation does appear to finally be cooling, though not as quickly as the Fed had hoped and still well above its 2% annual target. The index, the Fedâs preferred inflation gauge, rose 4.2% in March, down from a 5.1% increase in February. Once you strip out volatile food and fuel prices, however, the picture is slightly darker: The core index remained almost from February, coming in at 4.6% on an annual basis â a sign that inflation could persist longer than expected.
However, the Fed must now navigate a more complicated economic environment than it did through much of 2022. Recent bank failures, including the sale of to JP Morgan Chase on May 1, as well as the ongoing threat of a , mean that the Fed must tread carefully if it wants to maintain a robust job market while decreasing the sting of inflation.
The FOMC acknowledged the challenging balance of reaching "maximum employment and inflation at the rate of 2 percent over the longer run" in its statement. "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committeeâs goals," it said. "The Committeeâs assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
So what does it all mean for your money? Since itâs hard to predict what exactly the Fed will do next, the best thing savers can do right now is compare offers from multiple banks and make sure their cash is working as hard for them as possible while rates are still high.
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 lenderâs website for the most current information.
This article was originally published on 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.
