Will the savings rate continue to rise in the absence of Federal Reserve action? broke the record for 10 consecutive rate hikes. The target range remains 5% to 5.25%.
Yields on savings accounts have soared since the series of rate hikes began. According to the Federal Deposit Insurance Corporation, the national average savings rate in January 2022 was 0.06%. The highest yielding savings rate at the time was about 0.50%.
As of May 15, 2023, the FDIC’s national average savings rate is 0.40%, and some of the best savings accounts are profitable. 4% or more Annual Yield (APY). Some savings accounts yield over 5%.
But what should savers expect now that Fed officials have stopped raising rates? To learn more about how the Fed and Federal Funds rates can affect your savings rate, read on.
Will my savings rate continue to rise?
Maybe. It’s true that prices haven’t risen as sharply as they have in the past year, but we may still see a slight increase. Banks will certainly raise interest rates in connection with the Fed’s move, but there are other reasons as well, such as attracting customers.
If your savings account is not yet earning more than APY 4%, you may be able to increase your savings rate now by switching to a higher yielding account.
If you’re worried about interest rates going down, consider locking in your current yield by putting your money in a fixed deposit. certificate of deposit. This type of savings account offers a fixed interest rate in exchange for keeping money locked in the account for a period of time. CDs should be used more for savings you know you won’t need right away, not your money. emergency fund.
Depending on the term, some CDs pay higher yields than the highest yielding savings accounts. Also, since the rate is fixed when the CD is opened, it compensates if the rate starts to drop.
You can use CD calculator Understand how much interest you can earn on various CD terms and rates.
Why should you aim for high APY?
taller than Ape Simply put, no matter how much money you have stash, your money will grow faster. If he keeps $10,000 in an APY 4% savings account for two years, he earns $831 in interest. An account with only 0.40% APY would win $80.
You don’t need to pay large sums of money up front to take advantage of the high yields. Starting at $20, deposit $20 monthly for 2 years in a savings account that pays 4% APY and earn $21 in interest. This is an additional month’s worth of contributions as opposed to only earning $2 in interest if his APY on the account is 0.40%.
How the Federal Funds Rate Affects Your Account
of federal funds rateAlso known as the Fed rate, it is the rate that banks use to exchange money overnight. This rate is set by the Fed’s Federal Open Market Committee. The FOMC’s mission is to inflationand one of the ways the Commission does this is by changing the Fed rate as needed.
Higher interest rates charged by banks are passed on to consumers who use variable rate products such as credit cards, increasing costs to borrowers. This tends to weaken the demand for goods and services and lower prices.
But the Consumer Financial Protection Agency, an independent agency within the Federal Reserve, says savers stand to benefit because variable savings yields tend to rise with Fed rate hikes. This means that interest rates for savings accounts, credit cards, mortgages, and other forms of credit such as personal loans are all affected by the Federal Funds rate.
The Fed’s decision to stay on hold likely means that there will be no significant interest rate movements for the foreseeable future. But whether interest rates rise, fall, or stay the same, keeping money in a high-yield savings account or CD will keep your balance growing at the highest possible interest rate. You get the benefits.