We’re only 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 remain high for months, if you’ve been waiting to take advantage of high rates, you’ll want to move quickly.
For over a year, the Fed has raised its federal funds rate 10 times to combat high inflation. While the hikes have had a rippling effect on interest rates for credit cards and loans — making it more expensive to finance a purchase — they’ve also boosted savings rates, pushing high-yield savings account APYs over 4.00% and certificates of deposit over 5.00%.
But for the first time since March 2022, some experts believe the Fed will pause its rate hikes. So, what does that mean for your high-yield savings account or CD that’s benefited from the rate increases all this time?
“The Fed isn’t likely to touch rates this month,” said Stuart Caplan, chief investment officer at Apex Financial Advisors. “They want to see more data before making any more decisions.”
Usually, banks follow the Fed’s rate movement, so if the Fed keeps rates stagnant at tomorrow’s Federal Open Market Committee meeting, banks may keep interest rates the same, but others may keep pushing annual percentage yields higher.
Here’s where the best savings and CD rates stand for now and why some banks may deviate from the Fed’s direction and continue pushing rates higher in the coming weeks.
High-yield savings accounts are inching closer to 5% APY
Most of the banks we track at CNET kept their savings rates the same this week — with a few outliers. Bask Bank pushed its APY up to 4.85% and Bread Savings went up to 3.75%. Meanwhile, SoFi and Synchrony both increased rates to 4.30% APY. CNET’s average savings rate increased slightly from 4.51% to 4.54%.
Even though 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 increase.
Short-term CD APYs are surpassing longer terms, for now
Even though the Fed may keep rates where they are, many online-only banks are still increasing rates on deposit accounts. With the federal funds rate at 5.25%, some certificates of deposit rates are already at 5.15% APY for six-month and one-year terms.
As a note, long-term CDs, including three- and five-year CDs didn’t move at all this week, based on CNET’s weekly analysis. But the average one-year CD went up to 4.95%, bringing the average closer to 5.00% this week. CFG Bank pushed its one-year CD to 5.32% and MYSB Direct went up to 5.23%. Ally Bank also pushed its one-year and 18-month CDs up to 4.50% and 5.00% APY, respectively.
Why savings and CD rates will continue to rise
Generally, banks move in lockstep with the Fed’s rate movements, and most experts believe that this week the Fed will pause rate hikes for the first time in over a year. There’s still a chance that it will resume rate hikes in the fall, if not sooner, depending on inflation, employment and overall growth factors, Caplan added. It’s unlikely that rates will go up more than 25 basis points at a time for the foreseeable future.
But that won’t stop banks from pushing rates higher, he said. It’s more about individual banks competing with others for deposits and less of a focus on predicting how high rates will go, said Caplan. Plus, more deposits equals more loans the bank can issue to borrowers. And with the Fed’s rate currently at 5.25%, if banks can borrow from depositors at a cheaper rate than what they have to borrow or lend, they will,” said Caplan.
The second reason banks may push rates higher is to reduce any portfolio risks they may have. “They need to hike their CD rates and attract fresh funds rather than selling their treasuries and taking losses,” said Dr. Tenpao Lee, professor emeritus of economics at Niagara University.
Regardless of the reason, that’s good news for your savings. That means there’s 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’s still a chance that some banks will slightly dip rates or that rates will drop as inflation tapers off.
How much higher will savings and CD rates go?
Banks are likely to keep pushing rates higher to stay competitive and keep deposits, said Caplan. But how high will rates go, and how long will they last?
“It is likely that the banks will stop raising rates when the bond market improves, and they are able to unload their treasuries to operate normally,” said Lee. He expects that CD rates for some banks and terms will land around 5.50% APY and will likely not exceed 6% APY. Most banks won’t surpass 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 that CD rates will remain high until mid-2024, he added.
But high-yield savings accounts offer slightly lower interest rates than that of CDs. Currently, some online high-yield savings accounts can earn 5.00% APY for a limited introductory period, said Lee. But unlike CD rates, savings rates may decline sooner.
“In the near future, the interest rates of high-yield savings accounts will probably decline gradually to 4.00% or less as the banking sector stabilizes with better liquidity strategies,” said Lee.