[ad_1]
Here’s an excerpt from Dollar Scholar, a money newsletter where news editor Julia Glum shares the modern money lessons you need to know. Don’t miss the next issue!sign up money.com/subscribe Join a community of over 160,000 scholars.
You never know what you’ll get when you open your email inbox.
Half the time, it’s good news — your Amazon package has shipped! Emo Night Brooklyn announces new show! Hello grandma! But the other half of the time, it’s not that great. You have to pay your electricity bill! Prices for holiday flights have increased!
Hmm.
Over the last few years, I’ve grown accustomed to mentally sorting communications from Ally, an online bank, into the second category. The emails were mostly warnings that Allie was lowering the interest rate on my high yield savings account.
That was changed on May 10th. increase Annual Yield (APY) for all balance tiers from 0.5% to 0.6%. It’s the first time since her January 2019 that Ally’s APY has increased.
In shock, I wrote it off as a fluke. But it happened again on May 26th and again on June 9th. It happened a few more times after that and finally this week he reached 2.35%.
In a recent email, Alley linked the rate hike to recent trends, market conditions and other factors, adding that it is “part of our effort to offer competitive rates.” But his Ally isn’t the only online bank raising rates. Marcus (currently 2.35%), Synchrony (2.45%) and others are also jacking his APY.
How high will the high-yield savings rate go?
Online banks can generally offer attractive interest rates, according to Laura Cuber, a certified financial planner at Bartlett Wealth Management. Because unlike a brick and mortar store, you don’t have to pay overheads. They use high rates as a way to attract customers, but without physical locations and legacy brands, this is much more difficult.
Late 2018 and early 2019 saw a golden age for online banking. Interest rates were above his 2% as the economy was doing well and there was stiff competition from each other. Then the Federal Reserve cut interest rates in his mid-2019, and in 2020 the coronavirus hit and all that growth was undone.
The recovery we are seeing now also has implications for the Federal Reserve. The country’s central banking system is trying to keep inflation under control by raising the federal funds rate.
“The cost of borrowing money in this country is determined by the federal funds rate. When it is high, banks can make more money by lending out customers’ deposits at a higher rate,” Cuber said. said in an email interview. “In turn, they offer customers higher interest rates to encourage banks to keep their deposits.”
The Fed currently has five rate hikes in 2022. As of this writing, the target federal funds rate is 3% to 3.25%.
Illinois wealth adviser Fallon Dogues says the Fed’s hope is to make people less willing to borrow money by increasing the cost of borrowing money. . Less dollars chasing limited commodities means lower prices and higher APY.
Rising interest rates for online savings accounts have always lagged behind the Fed’s rate hikes. But when one online financial institution raises its savings rate, it sets off a chain reaction, “putting pressure on other banks to follow suit because they don’t want to lose customers,” he added.
How high interest rates go will depend on how high inflation gets and how aggressive the Fed wants to be, said Joel Kiskira, senior director of cash management operations at Personal Capital. .
Cuber says there’s no upper limit, but “I’d be surprised if we hit double-digit rates.” The last time U.S. savings account yields reached that level was in the 1980s when inflation peaked at 13.6%. There were obviously no online banks at the time, but according to the St. Louis Fed, the average three-month yield on certificates of deposit (a type of savings account) reached 18.65% in December 1981.
The rate has been below 10% since March 1989. And clearly, even the much higher-than-normal inflation rate is nowhere near 13.6%.
More specifically, Dogues predicts that high-yield savings rates could reach 3% when the federal funds rate hits 4%.
For me, that means my savings are working harder than normal. Kiskila said high-yield savings accounts at online banks are great because they offer FDIC insurance, high liquidity, and convenience for free.
What are the drawbacks? They are not keeping up with inflation. Cuber says you should set aside enough cash reserves for a healthy emergency fund, but to ensure you can maintain your desired standard of living, you need to make sure that you have enough money. We would also like to consider investing a portion of
Conclusion
Online banks are raising APY with high-yield savings products in response to the Fed’s move. Interest rates are likely to continue rising for now, but could plateau soon and fall well below 10%.
“Rising interest rates are not very good news for borrowers,” Kiskira said. “But for savers, this is a good opportunity to save money.”
Details from money:
Is Your Checking Account Balance Too Low? What The Experts Say
How Powerful Is Fed Chairman Jerome Powell Really?
The real reason people are obsessed with credit unions
[ad_2]
Source link