Lauren Williamson is the Financial and Home Services Editor for the Hearst E-Commerce team. She previously served as Senior Editor at Chicago magazine, where she led coverage of real estate and business, and before that reported on regulatory law and financial reform for a magazine geared toward in-house attorneys. You can reach her at lauren.williamson@hearst.com.Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research. Mobile app users, click here for the best viewing experience.As its battle against inflation appears to be drawing to a close, the Federal Reserve is expected to hike interest rates one last time this cycle on May 3. If the Fed hikes rates by another quarter point, as predicted, that would bring the benchmark borrowing rate to 5%-5.25%.The Fed has raised the target federal funds rate — what it costs banks to borrow from each other — nine times since March 2022. It’s the most aggressive streak of rate hikes on record, with the federal funds rate jumping 4.75 percentage points between March 2022 and March 2023.While the Fed doesn’t directly set interest rates on consumer financial services like loans and savings accounts, they tend to rise in tandem with the federal funds rate. As a result of the historic streak of hikes, borrowers have suffered over the past nine months with skyrocketing rates, especially on mortgages, which hit a 20-year peak in the fall. Savers, on the other hand, have been taking advantage of the best interest rates in years. If you shop around, and particularly if you’re willing to consider online banks, it’s possible to find rates on CDs upwards of 5% — the highest in recent memory.However, by keeping its projection for the terminal rate steady at 5.1%, the Fed is signaling that its campaign of rate hikes may be coming to an end. If that’s the case, interest rates on savings vehicles have probably peaked. That’s why if you’ve been considering moving your money into a CD, this is the moment to lock in the best rates in 15 years.PHNwYW4+PC9zcGFuPjxzY3JpcHQgYXN5bmM9InRydWUiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlLmpzIj48L3NjcmlwdD48ZGl2IGNsYXNzPSJteUZpbmFuY2Utd2lkZ2V0IiBkYXRhLWFkLWlkPSIwN2ZiOTg4My0yNzgwLTQ3MjItYmIzZi1mMjBhZWEwYWM1ZWEiIGRhdGEtY2FtcGFpZ249ImhlYXJzdHR2LWNkLW11bHRpIiBkYXRhLXN1Yi1pZD0iaHR0cDovL3d3dy5rY3JhLmNvbS9hcnRpY2xlL3B1dC15b3VyLW1vbmV5LWluLWEtY2QtcmlnaHQtbm93LzQzNDQwNjMxIj48L2Rpdj4==How does the Federal Reserve affect savings account interest rates?The Federal Reserve doesn’t set interest rates on CDs or other consumer financial products, but its actions have an effect on them. When the federal funds rate goes up, banks tend to raise interest rates on deposits like savings accounts and CDs as a way to attract more customers. Interest on savings accounts has risen more slowly this past year than conventional wisdom would suggest. But it’s still more than tripled since the Fed started its push in March 2022. As of April 19, the national average interest rate for savings accounts is 0.24%, consistent with the previous week, according to Bankrate’s weekly survey.If you’re looking for the greatest return, online banks tend to offer much better interest rates than traditional banks — in some cases, thousands of times higher. Short-term CDs — those that lock your money in place for a year or less — have the best returns right now, with some interest rates topping 5%. They’re an excellent option if you plan to leave your money in place for a while. The most fruitful high-yield savings accounts, on the other hand, are offering interest rates upwards of 4%. Most high-yield savings accounts provide the same accessibility as traditional savings accounts, such as the ability to easily transfer money to a checking account. They’re a great match for people who need flexibility with their funds.PHNwYW4+PC9zcGFuPjxzY3JpcHQgYXN5bmM9InRydWUiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlLmpzIj48L3NjcmlwdD48ZGl2IGNsYXNzPSJteUZpbmFuY2Utd2lkZ2V0IiBkYXRhLWFkLWlkPSJjYjdiMTc1Yy03YjU2LTRmY2QtODVjZS1kYjcxNjJmZDhmM2UiIGRhdGEtY2FtcGFpZ249ImhlYXJzdHR2LXNhdmluZ3MtbXVsdGkiIGRhdGEtc3ViLWlkPSJodHRwOi8vd3d3LmtjcmEuY29tL2FydGljbGUvcHV0LXlvdXItbW9uZXktaW4tYS1jZC1yaWdodC1ub3cvNDM0NDA2MzEiPjwvZGl2Pg==How a CD worksWhen you commit to a CD, the bank is also making a promise: that it will honor the same interest rate for the length of the term. Terms typically range from one to five years (though you can find CDs with terms as short as three months). In most cases, you’ll find the best interest rates on CDs with longer terms, though as previously mentioned, at the moment many of the best rates are on 1-year CDs.Once you put your money in a CD, you must leave it there for the length of the term or you’ll have to pay a fee for taking it out early (known as an early withdrawal penalty). You also can’t add to it once the term starts. So before locking any of your money in a CD, you’ll want to be certain you can afford to part with it for that long. That’s why most people will have a mix of CDs and savings accounts, which let you withdraw money when you need it.CDs are a low-risk way to grow your savings, aside from the risk you might incur by locking your money in one place for a specific length of time. CDs are insured up to $250,000, as long as they’re with a bank that’s insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Administration.Once your CD matures (that is, reaches the end of its term), you will typically have seven to 10 days to decide what to do next. You can renew the CD at the current rate, withdraw the money, or move it to another account or CD. If you do nothing, most banks will renew the CD for the same term but at the current rate, which might be higher or lower than the rate when you originally took out the CD. Are more Fed rate hikes coming in 2023?In a press conference after the March 22 rate hike, Fed Chair Jerome Powell declined to say whether the FOMC would impose more rate hikes in 2023, in light of the economic turbulence created by the Silicon Valley Bank collapse. “It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond,” he said. “As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate.”Powell said that the FOMC “considered” holding off on an increase this month in response to the banking crisis. But ultimately they decided that another immediate rate hike was necessary to further curb inflation. “Inflation remains too high, and the labor market continues to be very tight,” he said. “Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.”Since the FOMC’s last meeting, inflation indicators haven’t provided a clear path forward for the Fed. Prices of goods and services rose 6% in February over the previous year, a small decline from the 6.4% increase in January, according to the Consumer Price Index report released March 14. Employment, meanwhile, remains strong, with 311,000 new jobs created in February, according to the jobs report released March 10. Unemployment, however, ticked up slightly to 3.6%, higher than the expected 3.4%, showing that the labor market might be starting to soften. Then there’s the instability thrust into the economy by the banking crisis. The Fed is also likely to begin facing greater pushback from Congress in the coming months. Senate Majority Leader Chuck Schumer said after the Fed’s March 22 announcement that he was “concerned about effect on the economy.” The upshot for consumers: If the Fed sticks to its projections for the terminal rate, there’s a decent chance that CD rates are as good as they’re going to get for this rate hike cycle. If you’ve been sitting on the fence about opening a CD, it’s a great time to lock in an excellent rate for the next year. PHNwYW4+PC9zcGFuPjxzY3JpcHQgYXN5bmM9InRydWUiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlLmpzIj48L3NjcmlwdD48ZGl2IGNsYXNzPSJteUZpbmFuY2Utd2lkZ2V0IiBkYXRhLWFkLWlkPSIwN2ZiOTg4My0yNzgwLTQ3MjItYmIzZi1mMjBhZWEwYWM1ZWEiIGRhdGEtY2FtcGFpZ249ImhlYXJzdHR2LWNkLW11bHRpIiBkYXRhLXN1Yi1pZD0iaHR0cDovL3d3dy5rY3JhLmNvbS9hcnRpY2xlL3B1dC15b3VyLW1vbmV5LWluLWEtY2QtcmlnaHQtbm93LzQzNDQwNjMxIj48L2Rpdj4KEditorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.This article was originally published on SFGate.com and reviewed by Jill Slattery, who serves as VP of Content for the Hearst E-Commerce team. Email her at jill.slattery@hearst.com.
Lauren Williamson is the Financial and Home Services Editor for the Hearst E-Commerce team. She previously served as Senior Editor at Chicago magazine, where she led coverage of real estate and business, and before that reported on regulatory law and financial reform for a magazine geared toward in-house attorneys. You can reach her at lauren.williamson@hearst.com.
Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.
Mobile app users, click here for the best viewing experience.
As its battle against inflation appears to be drawing to a close, the Federal Reserve is expected to hike interest rates one last time this cycle on May 3. If the Fed hikes rates by another quarter point, as predicted, that would bring the benchmark borrowing rate to 5%-5.25%.
The Fed has raised the target federal funds rate — what it costs banks to borrow from each other — nine times since March 2022. It’s the most aggressive streak of rate hikes on record, with the federal funds rate jumping 4.75 percentage points between March 2022 and March 2023.
While the Fed doesn’t directly set interest rates on consumer financial services like loans and savings accounts, they tend to rise in tandem with the federal funds rate. As a result of the historic streak of hikes, borrowers have suffered over the past nine months with skyrocketing rates, especially on mortgages, which hit a 20-year peak in the fall.
Savers, on the other hand, have been taking advantage of the best interest rates in years. If you shop around, and particularly if you’re willing to consider online banks, it’s possible to find rates on CDs upwards of 5% — the highest in recent memory.
However, by keeping its projection for the terminal rate steady at 5.1%, the Fed is signaling that its campaign of rate hikes may be coming to an end. If that’s the case, interest rates on savings vehicles have probably peaked. That’s why if you’ve been considering moving your money into a CD, this is the moment to lock in the best rates in 15 years.
How does the Federal Reserve affect savings account interest rates?
The Federal Reserve doesn’t set interest rates on CDs or other consumer financial products, but its actions have an effect on them. When the federal funds rate goes up, banks tend to raise interest rates on deposits like savings accounts and CDs as a way to attract more customers.
Interest on savings accounts has risen more slowly this past year than conventional wisdom would suggest. But it’s still more than tripled since the Fed started its push in March 2022. As of April 19, the national average interest rate for savings accounts is 0.24%, consistent with the previous week, according to Bankrate’s weekly survey.
If you’re looking for the greatest return, online banks tend to offer much better interest rates than traditional banks — in some cases, thousands of times higher. Short-term CDs — those that lock your money in place for a year or less — have the best returns right now, with some interest rates topping 5%. They’re an excellent option if you plan to leave your money in place for a while. The most fruitful high-yield savings accounts, on the other hand, are offering interest rates upwards of 4%. Most high-yield savings accounts provide the same accessibility as traditional savings accounts, such as the ability to easily transfer money to a checking account. They’re a great match for people who need flexibility with their funds.
How a CD works
When you commit to a CD, the bank is also making a promise: that it will honor the same interest rate for the length of the term. Terms typically range from one to five years (though you can find CDs with terms as short as three months). In most cases, you’ll find the best interest rates on CDs with longer terms, though as previously mentioned, at the moment many of the best rates are on 1-year CDs.
Once you put your money in a CD, you must leave it there for the length of the term or you’ll have to pay a fee for taking it out early (known as an early withdrawal penalty). You also can’t add to it once the term starts. So before locking any of your money in a CD, you’ll want to be certain you can afford to part with it for that long. That’s why most people will have a mix of CDs and savings accounts, which let you withdraw money when you need it.
CDs are a low-risk way to grow your savings, aside from the risk you might incur by locking your money in one place for a specific length of time. CDs are insured up to $250,000, as long as they’re with a bank that’s insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Administration.
Once your CD matures (that is, reaches the end of its term), you will typically have seven to 10 days to decide what to do next. You can renew the CD at the current rate, withdraw the money, or move it to another account or CD. If you do nothing, most banks will renew the CD for the same term but at the current rate, which might be higher or lower than the rate when you originally took out the CD.
Are more Fed rate hikes coming in 2023?
In a press conference after the March 22 rate hike, Fed Chair Jerome Powell declined to say whether the FOMC would impose more rate hikes in 2023, in light of the economic turbulence created by the Silicon Valley Bank collapse.
“It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond,” he said. “As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate.”
Powell said that the FOMC “considered” holding off on an increase this month in response to the banking crisis. But ultimately they decided that another immediate rate hike was necessary to further curb inflation.
“Inflation remains too high, and the labor market continues to be very tight,” he said. “Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.”
Since the FOMC’s last meeting, inflation indicators haven’t provided a clear path forward for the Fed. Prices of goods and services rose 6% in February over the previous year, a small decline from the 6.4% increase in January, according to the Consumer Price Index report released March 14.
Employment, meanwhile, remains strong, with 311,000 new jobs created in February, according to the jobs report released March 10. Unemployment, however, ticked up slightly to 3.6%, higher than the expected 3.4%, showing that the labor market might be starting to soften.
Then there’s the instability thrust into the economy by the banking crisis. The Fed is also likely to begin facing greater pushback from Congress in the coming months. Senate Majority Leader Chuck Schumer said after the Fed’s March 22 announcement that he was “concerned about [the latest hike’s] effect on the economy.”
The upshot for consumers: If the Fed sticks to its projections for the terminal rate, there’s a decent chance that CD rates are as good as they’re going to get for this rate hike cycle. If you’ve been sitting on the fence about opening a CD, it’s a great time to lock in an excellent rate for the next year.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Jill Slattery, who serves as VP of Content for the Hearst E-Commerce team. Email her at jill.slattery@hearst.com.
