We’re just a day away from the Federal Reserve’s next decision on whether we’ll see another rate hike. And although experts expect savings rates to stay high for months, if you’ve been waiting to take advantage of the high rates, you’ll want to act fast.
For more than a year, the Fed has raised the federal funds rate 10 times to combat high inflation. While the increases had a ripple effect on credit card and loan rates—making it more expensive to finance a purchase—they also boosted savings rates, pushing the APY on high-yield savings accounts above 4.00% and certificates of deposit above 5.00% .
But for the first time since March 2022, some experts believe the Fed will stop raising interest rates. So what does this mean for your high-yield savings account or CD that’s been benefiting from rate hikes all this time?
“The Fed probably won’t move rates this month,” said Stuart Kaplan, chief investment officer at Apex Financial Advisors. “They want to see more data before they make more decisions.”
Banks typically follow the Federal Reserve’s interest rate movements, so if the Fed keeps rates steady at tomorrow’s Federal Open Market Committee meeting, banks may keep interest rates unchanged, but others may continue to raise annual interest rates.
Here’s where the best interest rates for savings and CDs are right now, and why some banks may deviate from the Fed’s direction and continue to raise rates in the coming weeks.
High-yield savings accounts approach 5% APY
Most of the banks we track at CNET kept their savings rates the same this week — with a few deviations. Bask Bank raised its APY to 4.85% and Bread Savings rose to 3.75%. SoFi and Synchrony, meanwhile, raised rates to 4.30% APY. CNET’s average savings rate increased slightly from 4.51% to 4.54%.
Although most high-yield savings rates aren’t as high as some short-term CDs, savings accounts have a variable APY that experts predict will continue to rise.
Short-term CD APYs are outperforming longer-term ones so far
Although the Federal Reserve may keep rates where they are, many online banks are still raising interest rates on deposit accounts. With the federal funds rate at 5.25%, interest on certain certificates of deposit is now 5.15% APY for six-month and one-year terms.
As a note, long-term CDs, including three- and five-year CDs, were little changed this week, based on CNET’s weekly analysis. But the average one-year CD rose to 4.95%, bringing the average closer to 5.00% this week. CFG Bank increased its one-year CD to 5.32% and MYSB Direct rose to 5.23%. Ally Bank also raised its one-year and 18-month CDs to 4.50% and 5.00% APY, respectively.
Why savings and CD rates will continue to rise
Banks generally move in step with the Fed’s interest rate moves, and most experts believe the Fed will hold off on rate hikes this week for the first time in more than a year. There is still a chance it could resume raising interest rates in the fall, if not sooner, depending on inflation, employment and overall growth factors, Kaplan added. Rates are unlikely to rise more than 25 basis points at a time in the foreseeable future.
But that won’t stop banks from raising rates, he said. It’s more about individual banks competing with others for deposits and less about a focus on predicting how high interest rates will be, Kaplan said. Plus, more deposits equal more loans that the bank can extend to borrowers. And with the Fed rate currently at 5.25%, if banks can borrow from depositors at a lower rate than they have to borrow or lend, they will do it,” Kaplan said.
The second reason banks may raise interest rates is to reduce any portfolio risk they may have. “They should raise their CD rates and raise fresh funds instead of selling their securities and taking losses,” said Dr. Tenpao Lee, professor emeritus of economics at Niagara University.
Regardless of the reason, this is good news for your savings. This means there is more time to earn a higher return on your savings compared to the low rates we saw from most banks during the pandemic. But there is still a chance that some banks will cut rates slightly, or that rates will fall as inflation eases.
How much higher will CD savings and rates be?
Banks will likely continue to raise rates to stay competitive and retain deposits, Kaplan said. But how high will interest rates be and how long will they last?
“Banks will probably stop raising interest rates when the bond market improves and they are able to unload their vaults to operate normally,” Lee said. He expects CD rates for some banks and terms to come in around 5.50% APY and probably won’t exceed 6% APY. Most banks won’t go above the federal funds rate to offer even higher rates on your savings. He expects that to take about a year, so there’s a chance CD prices will remain high until mid-2024, he added.
But high-yield savings accounts offer slightly lower interest rates than CDs. Currently, some high-yield online savings accounts can earn 5.00% APY for a limited introductory period, Lee said. But unlike CD rates, savings rates can decline sooner.
“In the near term, interest rates on high-yield savings accounts are likely to gradually decline to 4.00% or less as the banking sector stabilizes with better liquidity strategies,” Lee said.