Savings Account Rates Could Rise to 2% This Year With Fed Rate Hikes, Experts Predict. Here’s What that Means for Your Money – NextAdvisor

by MoneySaverExpert

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Savings account interest rates are beginning to show signs of life. 

Yields are still low today — even many of the best high-yield savings accounts are still under 1% APY. But as the Federal Reserve battles inflation, and continues to raise its target federal funds rate, rates on lending products like mortgages and credit cards are creeping up. For borrowers, that means those products are only getting more expensive. 

But there’s a silver lining for savers. The interest you earn on the money you keep in deposit products, including savings accounts, is also increasing. Interest rates on some savings accounts could be as high as 2% by the end of year, according to one expert’s prediction. 

Here’s what to know about rising interest rates, and what to expect in the future: 

Will Savings Account Rates Rise In the Future?

Some banks have already started raising savings APYs, a trend which experts say will continue in the near future.

“The interest rates that consumers can get in a savings account… will rise as the Federal Reserve continues to raise the fed funds target interest rate,” says Kenneth Chavis IV, senior wealth manager at LourdMurray, a California-based wealth management group.

However, rates will go up at varying speeds, and you won’t necessarily see an increase at every bank, according to Greg McBride, CFA, chief financial analyst at Bankrate. Like NextAdvisor, Bankrate is owned by Red Ventures. 

“Right now is a perfect example of that,” he says. “We are seeing online banks already engaged in the arms race of raising rates on CDs, savings accounts, and money market deposit accounts.” Local banks have been at the forefront, too. 

Pro Tip

How quickly your bank is raising savings account rates now is the best indicator of how competitive its rates will stay in the future.

But experts expect even more momentum to come. As banks roll out those higher yields, they’ll automatically increase rates for existing customers. You can make sure you maximize earnings on your short-term savings or emergency fund by choosing a competitive high-yield savings account today.

“Where you have your money is going to be very important the next couple of years,” McBride says. “At the speed interest rates are going up, some savings accounts are going to be earning 2% at the end of the year; some are going to be earning 0.02% at the end of the year. Which one of those you have your money in is entirely up to you.”

What Factors Influence Rates?

Deposit account APYs don’t always immediately follow the Fed’s rate changes — and Chavis predicts savings account rates, along with money market account rates and CD rates, won’t move as aggressively as the Fed’s target range will this year. 

But competitive savings rates do tend to follow the federal funds rate generally, and will keep a steady rise as the Fed hikes its benchmark interest rate higher.

One major influence on rising rates is today’s high inflation, which is being driven by everything from supply chain shortages to the war in Ukraine. Inflation has a great impact on the Fed’s decision to increase interest rates, which, in turn, affects the market interest rates financial institutions offer. 

“What the Federal Reserve is trying to do is slow the economy in an effort to bring down inflation, and the way they’re doing that… is raising benchmark, short-term interest rates,” McBride explains. “Like dropping a rock into a pond, that ripples out in all directions.” 

When the Federal Reserve pushes up its benchmark interest rate, it leads to higher interest rates on everything else, from government bond yields to credit card borrowing rates. As the cost of money increases, consumers also see higher payouts on savings accounts.

What Is the Federal Funds Rate?

The federal funds rate is the Federal Reserve’s main benchmark interest rate that banks use to charge each other for overnight lending to maintain a minimum balance in their accounts, as required by the Fed

When the Fed changes the target federal funds rate, it can have an effect on everything from mortgage rates to savings account yields and credit card interest.

Rates have been at record lows since the start of the pandemic, as the Fed kept its target rate near-zero. “It worked very well,” McBride says. “We saw very sharp financial markets [and] rebound in economic activity. Employment rebounded very sharply. Unfortunately, inflation also rebounded very sharply.” 

Over the past few months, the Fed has steadily begun to increase its target federal funds range. Most recently, the Fed increased its target rate by half a percentage point (to a range of  0.75-1.00%.) — the biggest hike since 2000. 

The Fed is expected to continue rate hikes, and quite rapidly — JP Morgan economists, for instance, have projected nine rate hikes this year. 

Will Higher Interest Rates Affect Savings Accounts?

With interest rates rising, savings accounts are expected to follow. Some accounts are already increasing APYs.

When interest rates go up, banks tend to begin increasing rates on savings accounts to attract new customers. This, in turn, creates a competitive environment, prompting more banks and financial institutions to follow.

“When the savings accounts and CD rates are higher, more people are more inclined to maybe keep a little more cash in their savings account or put something in the CD,” Chavis says. “[This] ultimately slows down or reduces the amount of money circulating in the economy, which is what the Fed wants.”

However, not every bank has the same incentive to entice customers to save more with higher rates. In fact, the national average savings interest rate is still just 0.07%, according to the Federal Deposit Insurance Corporation (FDIC). Higher yield savings accounts with some of the most competitive rates available today — some even upwards of 1% APY — typically come from online banks, credit unions, or local banks. 

Savings Accounts vs. Investing 

Even in a high-rate environment, you won’t find the same return from savings accounts as you will investing your money. 

Among high yield savings accounts, many of the best APYs are around 0.60% to 0.80% right now. The average historical return of the S&P 500, on the other hand, is about 10%. And considering the inflation rate was at 8.3% in April, it’s safe to say consumers are losing money by keeping it in a savings account.

However, savings accounts still play a key role in your financial portfolio.

Experts agree on the benefits of an emergency fund with at least three to six months worth of expenses. Your emergency savings should be highly liquid and safe from the risks of market fluctuations. That’s why it’s a good idea to keep this money in a savings account insured by the FDIC. Having that insurance means that the funds will be safe even if the bank goes out of business.

“The rate is really a secondary consideration because what you need above all else with your emergency fund is access,” McBride says. “We need to be able to get to the money at a moment’s notice when it’s needed.”

When it comes to money for longer-term goals, such as retirement, it is wise to invest it in a diversified portfolio of index funds or ETFs rather than keep it in a savings account where it won’t grow as much. You’ll take more risk, and experience plenty of short-term market volatility, but in exchange you can get much higher returns on those long-term investments.

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