When will interest rates on savings go up?
- Federal Reserve decisions can impact the interest rate on your savings account.
- Some banks will raise savings rates faster than others, but there probably won’t be an increase any time soon.
- Savers who want to be proactive about their savings can call their bank or explore other options.
The Federal Reserve raised the federal funds rate for the first time since the pandemic began last month.
If you’re a saver wondering when the interest rate on your savings account will go up, here are a few things to keep in mind that could affect your savings decisions this year.
Savings interest rate over the last five years
The Federal Reserve serves several purposes: to regulate banks, manage the nation’s money supply, and implement monetary policy tools.
Monetary policy, as set out in the Federal Reserve Act, aims to maintain price consistency, maintain long-term interest rates, and ensure that as many Americans as possible have jobs.
When making monetary policy decisions, the
organizes meetings throughout the year to analyze how to keep inflation stable while promoting employment.
Interest rates on savings have dropped significantly over the past five years because the Federal Reserve wanted to deal with the economic effects of the COVID-19 pandemic.
The Federal Reserve cut the federal funds rate to promote economic activity and encourage people to buy homes.
Aris Protopapadakis, associate professor emeritus of finance and economics at USC, notes that the COVID-19 pandemic was unique because the economy was quickly affected.
“The system kind of came to a screeching halt. The trick was not to break the economy while it was at a standstill, which means not creating big problems,” says Protopapadakis.
While the Federal Reserve’s decision to lower rates may have helped pay down debt or credit card loans, it also led to a significant drop in interest rates on savings.
Why is the Federal Reserve raising interest rates?
Protopapadakis argues that raising the federal funds rate is a backdoor way for the Federal Reserve to regulate economic activity and fight inflation.
When interest rates rise, your finances can be affected in many ways. You might see mortgage rates or insurance go up.
“Companies borrow less. Individuals borrow less. Housing values don’t rise as much and it’s harder to borrow. This slows down economic activity and eventually slows down inflation,” says Protopapadakis.
How savings account rates are determined
Savings interest rates are affected by the Federal Reserve. When the Federal Reserve raises the federal funds rate, interest rates on savings generally also rise.
However, Lindsey Bell, head of markets and money strategist for Ally, says interest rates on savings can lag behind other financial products.
“Rates for loan products like mortgages, car loans and credit cards tend to move much faster than those for a savings account or CD,” Bell notes.
Bell adds that banks can also react to federal funds rates in different ways. For example, some banks may increase savings rates faster than others, depending on the amount of their deposits.
When will interest rates on savings go up?
Although it depends on where you bank, most interest rates on savings will generally increase slowly. According to Bell, consumers could see CDs increase by around 2% to 2.5% by the end of 2022, and savings accounts could also increase rates throughout the year.
“If consumers are expecting to see a massive rate increase on their savings account over the course of this year, I would say you may be setting yourself up for some level of disappointment,” Bell advises.
Protopapadakis also says that the timing of the Federal Reserve to rein in inflation can also impact your savings decisions.
“If inflation is bad enough, interest rates don’t rise enough. Then people try to get out as much as they can to have savings accounts and invest in things that have a high return and high risk,” adds Protopapadakis.
Advice for savers
If you want to be proactive about your savings this year, Maggie Gomez, CFP® professional and owner of Money with Maggie, recommends that you call your bank and ask for a rate increase.
Gomez also suggests exploring different savings options at brokerage institutions or banks. However, before switching institutions, you will want to determine how much you will earn in interest to see if the rate is worth it.
“If you calculate how much money you have, multiplied by the interest rate you’re going to receive, you’ll know how much money you’re going to get paid,” Gomez says. “The percentage may look good, but you have to multiply it by what you have and see if that amount is worth it.”
Regardless of what banks are currently offering, Gomez says one of the most important things to focus on is developing the habit of saving.
“The majority of your growth will come from your own deposits versus any interest in any account,” advises Gomez. “Don’t let the lack of interest you get get you down. Saving money is going to have a real impact, and the more you can save the better, even in a low rate environment.”