As the Federal Reserve raises interest rates to fight creeping inflation, you might want to check if your savings account interest rate will rise accordingly. After all, saving is supposed to be more appealing than spending to cool down an overheated economy, right?
Yes but: Historically, interest rates on savings accounts have not risen in step with the Fed rate — although they fall when the Fed rate falls.
Data: FRED, Bankrate.com; Graphics: Erin Davis/Axios Visuals
Why it matters: With higher interest rates making it more expensive for Americans to pay off their mortgage, auto loan, and credit card bills, many will be desperate for a finance phase — especially when inflation is soaring and even basics tend to be more expensive.
Designation: Greg McBride, Bankrate’s chief financial analyst, says the above data on savings rates comes from a Bankrate survey of large US banks and that “big banks have a lot of pricing power.”
- “They rarely pay for liquid money like savings accounts and checking accounts,” says McBride.
big picture: Banks have historically been slow to increase the interest they pay on deposit accounts – after all, they don’t. passed Because they don’t have to compete very hard for people’s money.
- And when the country’s banks passed their annual Fed stress tests with flying colors last week – meaning they are poised to weather the recession – a debate has erupted over whether banks should hold more capital reserves. , which can make them more tense.
Where is it: Even if the big banks are in no hurry to raise rates, you can still find relatively good opportunities by browsing.
- “Banks that are starving for consumer deposits are offering exorbitant yields and are actively raising rates in this environment,” says McBride.
- For example, some high-yield savings accounts have referral rates in excess of 1%. My American Express Personal Savings account is up 0.9% and it seems to be increasing every week.
- Online high-yield accounts can offer better interest rates in part because they don’t have the overhead of brick-and-mortar banks.
- Certificates of deposit (CDs) track the Fed rate more accurately. But they’re offered on time-based terms (like 6 months, 12 months, etc.) and you’re penalized for early withdrawals – meaning they’re not a good option for money you need in the short-term. may be needed.
- Over the long term, the stock blows traditional savings accounts out of the water in terms of returns (especially if you reinvest your dividends). But markets occasionally fall — the S&P 500 is down about 20% year over year — while cash in a savings account is at least unaffected by market downturns.
- I-Bonds – long-term government savings bonds with interest rates that partially adjust for inflation – offer yields in excess of 9% and are all the rage with some money pundits these days. But there’s a limit to how many you can buy, and as with CDs, there are penalties for tapping too early.
What will happen next: Savings rates should continue to rise “for the coming months,” personal finance writer Kendall Little tells NextAdvisor.
- This is especially true for online-only banks, local banks, and credit unions, Little says, which compete with each other for your dollar a lot more than the big banks do.
bottom line: It’s still tough for a saver. However, remember that building wealth is a long-term process, and don’t forget about underutilized options like your employer’s (401) match if they offer one and you’re able to take advantage of it. It’s just free money.