Money > Banking & Loans
Martha C. White
The Fed is set to send savings and CD rates higher yet again. If your savings are still sitting at a bank where rates have barely budged, it might be time to look for a new account.
On Wednesday, the Fed announced a
quarter-percentage-point interest rate increase to its benchmark federal-funds rate, following its Jan. 31-Feb.1 meeting. The benchmark federal-funds rate is now set at a range of 4.5% to 4.75%—the highest since 2007.
The move is the eighth rate hike in the past year. But with signs inflation is coming under control, the Fed has also slowed the pace of increases from last fall when it issued a string of four 0.75 percentage-point increases.
Rapidly rising interest rates in 2022 gave heartburn to home buyers and credit card borrowers but cheered savers by breaking a decadelong streak of near-zero returns on cash parked in savings accounts, CDs and the like.
So if you’re not yet earning interest on your emergency fund or that bucket of money you’re socking away for a big purchase like a house or a car, seize the moment: The outlook for savers hasn’t looked this rosy since before the Great Recession.
Experts say now is the time to take advantage of these rising rates.
The Fed might be slowing down from last year’s rapid pace of rate hikes, but experts say policy makers’ anti-inflation campaign has a long way to go—which means even higher rates are on deck for 2023.
Although inflation has moderated a bit since last year, when the annual increase in the core personal-consumption expenditures price index—the Fed’s preferred measure for inflation—peaked at 5.4%, prices remain much higher than officials want to see. December’s core PCE price index clocked in at 4.4%—more than twice the Fed’s 2% target.
Fed-watchers say central bank officials are focusing on bringing the fed-funds rate to 5%, then holding it there for perhaps the remainder of 2023. While Wednesday’s expected hike brings the central bank within striking distance of that goal, Fed Board members will likely want to see inflation fall much further before they consider changing course. “Inflation anywhere between 4% and 7% is still a lot,” says Karen Shaw Petrou, co-founder of the advisory firm Federal Financial Analytics.
Policy makers’ economic projections released in December show that Fed officials don’t expect inflation to hit 2.1% until 2025.
The key to what steps the Fed might—or might not—take this year depends largely on what happens to the job market.
If demand for labor continues to run hot, with low unemployment pushing up wage gains and driving prices higher, Fed officials could respond by hiking rates further, waiting longer before lowering them or some combination of the two, says Ross Mayfield, investment strategy analyst at Baird, a wealth management firm.
Conversely, if policy makers miscalculate and the economy tumbles sharply, it could pressure them to reverse course and either hold rates or—in a worst-case-scenario—lower them sooner than they currently anticipate.
Savings and CD rates go up and down in response to the Fed’s rate adjustments, but those rates tend to lag the fed-funds rate. Banks are slow to pass those higher rates onto customers, in part, because they count on customers not bothering with the hassle of moving their money. With the threat of a potential recession, banks also have to consider how many deposits—which they use for lending—they’ll need if demand for loans falls because the economy slows.
And the biggest banks still pay a pittance on savings because they have other sources of income, such as the interest they earn on lent out funds, as well as fees they charge for underwriting and other services, and so on.
But market observers predict competition from digital direct-to-consumer banks and fintech neobanks could force banks—even the largest ones—to acknowledge the changing rate environment eventually and respond by increasing the interest they’re willing to pay depositors. “Sometimes it takes pressure from fintech startups to shake a legacy institution, Mayfield says. “It’s going to be slow, but I think the trend is going to be higher” rates.
If your money is still on the sidelines, the good news is that you haven’t missed the boat just yet, given that Fed officials have indicated that they want to keep rates elevated until 2024, says Dan North, senior economist, at Allianz Trade North America. “They won’t cut rates in 2023 at all,” he predicts.
In general, branchless digital banks and neobanks offer better interest rates on products like savings accounts and CDs because they don’t have the overhead that a bricks-and-mortar footprint demands. Being newer entrants in the industry also motivates them to offer competitive APYs in order to take market share from more well-established institutions. In addition, community banks and credit unions—which tend to rely on customer deposits more than big banks—can also offer competitive rates on savings accounts, money-market accounts and CDs.
If you’re looking for a place to start, check out Buy Side from WSJ’s picks for Best Savings Accounts and Best Online Banks.
“There are still large banks that are paying 0.01% on savings accounts,” he points out. If that’s your bank, he adds, you “absolutely should be taking advantage of a higher rate savings account.”
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