We were coming off three years of no Federal Reserve rate increases when we rang in 2022. It was evident in our savings accounts where the lowest rates, just half a percent annually, were very low.
Many things can happen in one year.
The Federal Reserve raised the federal funds rate seven times in response to inflationary economic circumstances. This totaled seven increases from December 2022. The highest-yield savings accounts earn upwards of 3% APY. This is a summary of how rate rises have affected bank accounts and what you can expect for 2023.
What does an increase in the federal funds rate mean?
A higher federal funds rate means that interest rates on loans and borrowing on debt (similar to carrying a balance in a credit card) will rise, making them more costly. Many bank deposit accounts, including certificates of deposit and savings accounts, are reaping solid benefits. While savings accounts that earned the highest APY were once close to 0.50%, today they are closer to 3% or higher.
You will earn more interest on your savings if you have higher rates. If you had $10,000 in a January 2022 account that earned 0.50% annual percentage yield (really that was one of the highest rates you could find) you would have made about $50 when you checked your account in January 20,23.
Now, if you put $10,000 into an account that earns 3.3%, you will earn more than $300 over 12 months (assuming the rate remains the same). To come up with additional scenarios, you can use a savings calculator.
Will the Fed raise interest rates in 2023?
Although no one can be certain, the Fed gives us clues about the Fed’s monetary policy plans in the near future. The Federal Reserve chair indicated that there might be fewer rate increases in the new year.
Recently, I had the opportunity to chat with Rene Nourse (a certified financial planner, founder, and CEO of Urban Wealth Management, El Segundo, California).
She believes there will be fewer rate increases as inflation slows.
This hypothesis is supported by the consumer price index. It is frequently used to measure inflation. The Bureau of Labor Statistics reported that the CPI rose 9.1% year-over-year in June 2022. However, it increased by 7.1% in November. This is not a significant increase, but it was still lower than its June peak, and with smaller monthly increases.
The Fed took steps to combat inflation and rates rose. Nourse states that if inflation drops below the Federal Reserve target, rate rises may be stopped. However, it is possible for rates to eventually fall. She says, “You will want to be prepared for both scenarios.”
What are you doing now to get the best rates?
Check that your savings account is earning today’s high rates. This means looking for accounts that offer high yields and no monthly fees.
The best high-yield savings account tend to have the highest yields when yields are high, and they also tend to be the most competitive when rates drop. Finding a great savings account can set you up for success, no matter how interest rates change.
Consider putting some cash aside to earn a guaranteed rate. The highest CD rates earn rates that surpass even the best savings rates. You will have to agree to not withdraw funds for a certain time, such as for one year. If you do, you may miss out on a higher rate of interest. However, if rates drop in 2023 which is not impossible, you will have locked in a high interest rate. You will know your yield regardless of rate changes.
The interest rate increased by a lot this year. This is good news for savers. However, it’s unlikely that yields continue to rise at the same pace in 2023. You can ensure that your money continues to work hard in the new year by storing your funds in CDs and savings accounts with high yield.