The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday with the Federal Open Market Committee saying in a statement
that the committee “seeks to achieve maximum employment and inflation at the rate of 2% over the longer run.”
Now at 5.25%-5.5%, the latest benchmark funds rate increase comes after a record-breaking year of persistent interest rate hikes. Experts say while the central bank’s actions will put more pressure on the cost to borrow in the months ahead, there’s at least one area where consumers might benefit: high-yield savings and CD rates.
And indeed, even ahead of Wednesday’s rate hike, we were already seeing some high-yield savings accounts paying well over 4% (see some of the highest-paying savings accounts here) and some CDs paying 5% or more (see some of the highest-paying CDs here). (More on those accounts below.) Will these types of savings and CD rate hikes continue?
Where might savings and CD rates go?
“When the Fed raises rates, banks typically increase borrowing costs by a corresponding amount (which helps cool the economy), but they pass on only a portion of the rate increase to depositors in the form of higher interest rates on savings accounts,” MaxMyInterest CEO Gary Zimmerman explains, adding that “this enables banks to earn more profit in higher rate environments — and earn less profit when interest rates are low.”
As a result of the Fed’s increase, just like with interest rate hikes in the past, many online banks and credit unions may start to increase both CD and high-yield savings account deposit rates and incentives. But this doesn’t mean that all savings and CDs are going to raise rates. Because brick-and-mortar banks often already have more deposits than they can lend, they don’t have much incentive to attract more deposits, Zimmerman explains.
“By contrast, online banks are growing and are looking for more deposits,” he says. “As a result, for each 25 basis points rate hike, online banks typically pass along 10 to 15 basis points of the increase to their depositors. So, for example, if your bank currently pays 4.00% interest and the Fed raises rates by 0.25%, your bank might raise their interest rate to 4.10% or 4.15%.”
What are some of the best-paying savings and CDs now?
Consumers have already been seeing high rates on many high-yield savings accounts and CDs. “The top-yielding savings accounts and certificates of deposit (CDs) are at a 15-year high,” says Greg McBride of Bankrate. See some of the highest-paying savings accounts here, and some some of the highest-paying CDs here.
In the weeks before today’s action, some financial institutions already started increasing their rates. Take these three, for example, which in the past seven days have boosted their CD offerings to 5.75% APY, ranking them as some of the highest available rate for CDs on the market today:
- Sun East Federal Credit Union: This credit union is offering its members a high 5.75% APY for 11-month CDs with minimum deposits of $100,000.
- Andrews Federal Credit Union: If you don’t have quite as much money to deposit, Andrews FCU has a 9-month CD for members with a high 5.75% APY rate for just $1,000 deposit minimums.
- Inova Federal Credit Union: This is currently the lowest minimum threshold with a $200 deposit minimum for this 5.75% APY rate on a 14-month CD from Inova FCU.
Financial institutions have also started to increase their rates for savings accounts in anticipation of today’s announcement. Although these numbers might not compare with the offerings for some CDs, savings accounts manage to deliver relatively higher than average rates with less restrictions and penalties in the process:
- CloudBank 24/7: There is just a $1 deposit requirement to earn this high 5.20% APY at CloudBank 24/7. There may be some delays here to make a withdrawal so be sure to read the fine print.
- OceanFirst Bank: This bank, too, comes with little to no restrictions for its high 5.17% APY savings account. Just make the $1 deposit minimum and you’re set.
All of the above accounts are insured by the FDIC, which protects deposits at banks by up to $250,000. For credit unions, the National Credit Union Administration, or NCUA, protects accounts up to the same amount.
What should consumers do now?
Many households have an opportunity to earn many times what they’re earning at their current bank, notes Max Lane, chief executive officer at financial services platform Flourish. “Inflation is scary, but one of the few ways to make this period work for investors is to think strategically about maximizing your cash,” Lane says, adding that “one of the best ways to do that is through a high-yield savings account with elevated FDIC insurance.” (See some of the highest-paying savings accounts here.)
Lane adds that there is no reason why you shouldn’t be getting over 4.5% APY on cash right now. “Given the Fed continues to signal that rates could be higher for longer, it is critical investors make sure they are optimizing the yield on their reserve savings right now,” Lane says. “For those with financial advisers, it’s essential to have meaningful discussions with financial advisors regarding cash and adopt a more strategic approach towards it. By doing so, you can harness the full potential of your savings and ensure they actively contribute to your financial growth.”