Interest Rates on Savings Accounts Rise Following Federal Reserve Rate Hike

Rising interest rates have a silver lining.

The spike in inflation that has forced the Federal Reserve (Fed) to raise its benchmark interest rate is finally having an effect on savers’ position to secure yield.

The Federal Reserve does not directly affect deposit rates, but they tend to correlate with changes in the target federal funds rate. As a result, interest rates on savings accounts at some of the largest retail banks are barely above the rocky bottom since the coronavirus pandemic crisis began. Today it averages just 0.08%.

Ken Tumin, founder of DepositAccounts.com, said that “things are starting to accelerate” now that interest rates are rising.

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Last month, average rates for online savings accounts posted their biggest monthly increase since 2017, according to his analysis.

Online-only banks such as Marcus by Goldman Sachs and Ally Bank offer higher returns, partly because they have lower overhead than traditional banks.

At Marcus, the average rate for online savings accounts is now about 1%, more than 12 times higher than the rate for traditional brick-and-mortar banks.

“If the dollar isn’t growing as much, it’s a great time to take a step back and look at your financials and be a little more strategic,” said Liz Ewing, Marcus’ chief financial officer.

Those yields will likewise continue to rise as the US central bank continues its rate hike cycle, she added. “When the Fed starts to move, it translates into changes in interest rates on banking products that customers are using,” she said. “[A high-yield savings account] Sounds like a no-brainer. ”

Historically, traditional certificates of deposit were another way to secure marginally better returns.

Currently, the average interest rate for 1-year CDs is 1.5%, and high-yield CD interest rates are over 2%, even better than high-yield savings accounts.

CDs that offer the highest yields usually have higher minimum deposit requirements and longer maturities.

However, inflation is currently higher than all of these rates, so money in savings loses purchasing power over time.

Rather than pegging your money below inflation, say, “The best deal right now is [series] I bond,” Tumin said of finding inflation-protected returns.

Because these assets are federally backed, they are virtually risk-free and yielded an all-time high of 9.62% annualized through October.

There are purchase limits and you can’t withdraw money for at least a year, but you can earn much higher returns than a savings account or a 1-year CD.

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