Will savings rates rise even without Federal Reserve intervention? Fed officials ended a two day meeting on Wednesday by deciding not to increase the federal funds rates, ending a 10-year streak that began in March 2022. The range of the target rate remains between 5% and 5.25 %.
Savings account yields have increased dramatically since the successive increases began. According to Federal Deposit Insurance Corp., in January 2022 the average national savings rate was 0.06 percent. At the time, high-yielding savings rates were around 0.50%.
The FDIC’s national average saving rate will be 0.40% by May 15th 2023. Some of the top savings accounts have yields of more than 4% APY. Some savings accounts offer yields of more than 5 %.
What should the saver expect, now that Fed officials are halting their rate increases? Learn more about the Fed’s federal funds rate and how it could impact your saving rate.
What is my future savings rate?
This could happen. The rates won’t rise as much as in the last year but they could still increase a little. Yes, banks raise interest rates in response to Fed actions, but they also do so for other reasons like attracting new customers.
Switching to a savings account that offers a higher rate of return could help you increase your saving rates.
You can lock in the current rates by placing your money into a Certificate of Deposit. A certificate of deposit offers you a fixed interest rate in exchange for locking your money in for a specified period of time. Use CDs for your savings you don’t expect to need anytime soon. Not as an emergency fund.
Some CDs offer higher returns than the best-yielding savings accounts, depending on how long they are held. Because you lock in the rate at the time you buy the CD, even if the rates drop, your investment is protected.
Use a CD Calculator in order to calculate the amount of interest that you will earn by using different CD rates and terms.
What are the benefits of a high annual percentage yield?
Simply put, a higher APY means that your money will grow faster no matter what amount you are saving. You would earn $831 if you kept $10,000 for 2 years in an account that offered a 4% annual percentage yield. You would earn $80 in an account that only offers a 0.4% APY.
It’s not necessary to invest a lot of cash to get higher returns. If you begin with $20, and you save that amount each month in an account paying 4% annual percentage yield (APY), you will earn $21 as interest. This is an additional month of savings, compared to only earning $2 if you had a 0.4% APY.
How to calculate the Federal Funds Rate
Federal funds rate (also known as the Fed rate) is the rate of interest that banks charge each other to transact overnight. The Federal Open Market Committee of the Fed sets this rate. The FOMC’s mandate is to reduce inflation. One way they do this is by adjusting the Fed rate as needed.
The cost of borrowing increases when the interest rate charged to banks is increased. This can be passed onto consumers who have products with variable rates, like credit cards. It tends to reduce demand, which leads to lower prices.
The Consumer Financial Protection Bureau (CFPB), an independent organization within the Federal Reserve System, says that savers benefit from the fact that variable yields on savings tend to increase along with Fed rate hikes. The federal funds rate affects rates for savings, credit cards and mortgages, as well as other types of credit such personal loans.
For the time being, the Fed’s decision to not change rates will likely mean that there are no major rate changes. You can still benefit from the highest rates of growth by keeping your money in high-yielding savings accounts or CDs, regardless of whether the rates increase, decrease or stay the same.