Interest rates on savings accounts have been rising fast, with the best accounts delivering the kind of juicy returns that haven’t been available for years. But if you are thinking of switching accounts, you may want to act sooner rather than later, experts say. With inflation coming under control, the pace of rate increases is expected to level off—or even to fall—within a few months.
Determined to fight rising prices, the Federal Reserve has been aggressively raising its benchmark federal-funds rate since March 2022. That has prompted some banks, which for years had been paying savers next to nothing, to up their game. The best have been recently offering rates in the 4% to 5% range.
While that might sound modest, “it’s a much more attractive return than you’ve gotten in savings accounts for a long time,” says Robert Schundler, head of research at the Colony Group, a Boston-based wealth management firm.Doing a little research to find the highest-yielding accounts can pay off, since there’s a wide gulf in what banks are offering. Your annual earnings on every $10,000 you deposit in a 4.5% savings account are $450; on a 0.42% account, which was the national average in July of 2023, just $42.
Where are interest rates headed in 2023?
The interest rates banks pay to attract savings deposits are closely tied to the benchmark federal-funds rate, the overnight rate at which banks lend money to each other. The Federal Reserve, which controls the fed-funds rate, has raised it 11 times since the start of 2022, from near zero to between 5.25% and 5.5% in July 2023. Higher interest rates help contain rising prices. And during that time the Fed’s medicine has brought the rates of inflation down from nearly 10% to about 3%.
With inflation in retreat, the market is betting that the Fed is done (or nearly done) hiking rates and will mostly keep them steady through the end of 2023 and gradually begin lowering them early in 2024. By the end of 2024, they could be more than a full percentage point lower, according to one popular indicator.
Of course, a lot could change between now and then. If inflation increases again the Fed may raise rates more or another ugly surprise could tip the economy into recession, causing policymakers to reverse course and slash interest rates. “We could see Fed easing and lower rates to stimulate economic activity,” Beiley says. That would prompt banks to lower the rates they offer on savings accounts and other deposit products like certificates of deposit.
Will savings rates go up in 2023?
Though they take their cues from the fed-funds rate, banks tend to take weeks or even months to hike their savings account rates. When the Fed cuts rates, on the other hand, banks waste no time lowering their own rates.
It’s all about the spread: Banks make money by collecting more interest on loans, and on Treasury bonds that they own, than they pay on deposits. When that profit margin begins to erode—or even approach the point at which the bank is losing money—bankers jump to get their books in order. “Banks do not get caught on the wrong side of a move up or down,” explains Casey Pisano, an advisor with Milford, Pa.-based Biondo Investment Advisors.
The upshot: Because inflation is slowing, and so too is the pace of Fed rate hikes, many financial advisors believe that the best savings account rates may hold steady for a time but begin to gradually fall when the Fed signals it’s ready to begin trimming rates.
But if you are planning to open a new savings account, or purchasing a longer-term instrument like a CD, there are risks to waiting. The Fed could cut rates sooner than expected, pulling savings rates down in the process.
Online banks offer competitive savings rates
So how do you find the most lucrative accounts? Start by looking beyond national brand names, whose sheer scale means they can gather all the deposits they want even while paying ho-hum interest rates.
Online banks often pay more because they’re not saddled with the expense of physical branches. LendingClub High Yield Savings, one of our Best Savings Accounts for 2023, is a prime example: Its annual percentage yield, or APY, which is the amount the depositor will earn over a year, is often among the highest around and is currently 4.5%. LendingClub requires only a $100 opening balance and has no monthly maintenance fees.
As always, be sure to read the fine print accompanying attractive offers. Many come with strings attached, such as requiring regular direct deposits or minimum balances. Also keep an eye out for introductory “teaser” rates that generally reset after three to six months. Focus instead on the APY, which will blend the rates for an accurate picture of what you’ll earn over a year.
Some of today’s best rates can be found in the robo advisor world. Betterment and Wealthfront, for example, have been competing hard for deposits, and both tout so-called cash-management accounts with APYs—around 4.5%. Investment accounts are not required to open these savings accounts, and the whole process takes place online. These companies don’t own banks; rather, they work with partner banks that provide FDIC insurance. And they farm out amounts in excess of the FDIC’s $250,000-per-depositor limit to multiple banks so that it’s all insured.
Don’t overlook your current bank if your goal is to push your interest rate up a notch. If you do a significant amount of business with your institution, or have a big new chunk of cash to save, see if they can sweeten your savings-account rate. “It’s always worth asking,” says Adam Stockton, director of retail deposits at research firm Curinos, “because it’s possible you can find what you’re looking for and stay with a bank that you know.”
Got a money question? Let Buy Side find the answer.Email[emailprotected].
Include your full name and location, and we may publish your response.
Meet the contributor
Steve Garmhausen
Steve Garmhausen is a contributor to Buy Side from WSJ.
