The Federal Reserve ended its January Federal Open Market Committee meeting by pausing rate hikes again for a fourth consecutive time — a move most experts anticipated. This is good news for savers looking to capitalize on the competitive rates that will likely stay put a little longer on high-yield savings accounts and certificates of deposits.
Fed Chair Jerome Powell noted the Fed won’t hesitate to adjust monetary policy — in other words, raise interest rates — based on future economic conditions. That said, he touted the positive progress made over the past year on easing inflation and maintaining low unemployment levels. “[FOMC] participants do not view it as likely to be appropriate to raise interest rates further,” Powell said at the Jan. 31 press conference (PDF). Further interest rate hikes have not, however, been ruled out if conditions call for them.
In today’s elevated rate environment, you can find many banks and credit unions that offer savings accounts and CDs with annual percentage yields, or APYs, of 5% or more. That said, most experts agree that savings APYs have hit their peak. Here’s what that means for you.
How the Federal Reserve influences deposit rates
The Fed’s FOMC meets eight times a year to assess interest rate changes — that’s about once every six weeks. At the most recent meeting on Jan. 31, the Fed decided to keep the current federal funds rate at a range of 5.25% to 5.50%.
The FOMC began targeting inflation with rate hikes in March 2022, and inflation hit a 40-year high of 9.1% in June of that year. The Consumer Price Index — an inflation indicator that measures the percentage change in costs for goods and services — rose by 0.3% in December 2023, according to the US Bureau of Labor Statistics. That put annual inflation at 3.4% for the past 12 months. While inflation is moving in the right direction, it remains higher than the Fed’s 2% target.
The Fed sets the federal funds rate, which determines how much banks charge to lend and borrow money. In turn, those rates influence deposit account APYs. If the federal funds rate is cut, APYs typically follow. However, the changes can take several weeks or even months to take effect.
Though some banks set their deposit account APYs according to the direction of the federal funds rate, timing and specific rates may vary. “Some big banks are swimming in deposits and they don’t need to pay up to bring in more,” said Greg McBride, chief financial analyst at CNET sister site Bankrate.
As such, there may be dramatic differences in account interest rates from bank to bank. “People should shop around, and they shouldn’t just shop around today; they should shop around a week from now, a month from now and three months from now,” said Gary Zimmerman, founder and CEO of MaxMyInterest.
When will rates drop?
Most experts believe we’ve reached the top for deposit account rates. “Interest rates are unlikely to rise much further, but we could witness cuts this year,” said Harry Turner, founder of The Sovereign Investor.
Home prices may also impact future Fed decisions on interest rates. “If we start seeing more of a slump in home purchases due to high interest rates, this could signal a tightening financial environment for consumers,” said R.J. Weiss, certified financial planner. “In this scenario, the pressure might mount on the Federal Reserve to consider lowering interest rates to stimulate borrowing and spending.”
But predicting exactly how rates will change in the next year isn’t an exact science. “Predictions about interest rates are really difficult to make even though the Fed is very open with what they want to do,” said Jordan Gilberti, CFP and senior lead planner at Facet.
Gilberti suggests preparing for the worst scenario when thinking about the best strategies for growing your savings, whether you’re setting aside cash for an emergency or building a sinking fund. Since it’s likely that rates are at peak highs, purchasing a CD or moving your money to a high-yield savings account as soon as possible is the best strategy for maximizing your interest earnings.
Tips for finding the right savings account or CD as rates rise
Keep in mind that larger, brand-name banks with larger marketing budgets aren’t the only ones offering competitive rates on savings accounts and CDs. Community or regional banks, credit unions and online-only banks often offer higher rates on deposit accounts to attract new customers.
“[Savers] need to think carefully about which savings accounts or CDs [to open],” Baruch Silvermann, CEO of The Smart Investor, wrote in an email to CNET. “With such uncertainty, it may not be a good idea to tie up your money for a longer term. You are likely to want the flexibility to be able to move your money fairly freely when a better opportunity arises.”
“[If] you’re looking at CDs, concentrate on shorter terms, so you can reinvest or move your money when they mature. Alternatively, you could choose a longer-term CD if there is no withdrawal penalty,” Silvermann added.
The best high-yield savings accounts offer APYs north of 5%, low fees and no minimum balance requirements. The best CD rates on six-month to five-year CD terms have come down slightly but continue to be as high as 5.5% APY. When evaluating a savings account, note any fees associated with opening or maintaining the account. CDs offer a safe, fixed rate of growth — as long as you can leave the funds in the account until the maturity date. Terms can last anywhere from three months to five years or more.
What savers should do
Before opening an account, confirm that your deposit is insured by either the Federal Deposit Insurance Corp. (for banks) or National Credit Union Administration (for credit unions). This protects your money for up to $250,000 per person, per institution if the bank fails. You should also compare APYs and how easily you can access your money before making your decision.
Understanding the pros and cons of each deposit account type can help you make the best choice for your needs.
Traditional savings accounts
Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be convenient. However, these accounts often pay minimal interest on your savings. The average annual percentage yield for a traditional savings account is only 0.47%, according to the FDIC.
Pros
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Traditional savings accounts are widely available at most financial institutions.
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Your money is easily accessible when you need it.
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If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person, per institution.
High-yield savings account
A high-yield savings account is an interest-earning account often offered by online banks, credit unions or other financial service institutions. The best APYs available on high-yield savings accounts are more than 5%.
Pros
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Some high-yield savings accounts earn more than 11 times than traditional savings accounts.
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Your money is easily accessible when you need it.
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If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person, per institution if the institution fails.
Cons
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Availability can be limited. These accounts aren’t offered by all banks or credit unions.
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Often available from online-only banks with no physical branches. You must be comfortable with a digital banking environment.
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Many accounts are provided by online-only banks with no physical branches. You must be comfortable with an entirely digital banking experience.
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Variable rates can change at any time.
Certificate of deposit
A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time at a predetermined APY.
Competitive one-year CDs, for example, can earn APYs as high as 5.5% or more.
Pros
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A fixed rate applies to the CD’s entire term.
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CDs are widely available at most banks or credit unions.
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If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person, per institution.
No-penalty CD
A no-penalty CD is a specialty CD that offers a fixed rate for a specific term, like traditional CDs. However, this deposit account doesn’t impose an early withdrawal penalty if you need to access your money before the term ends. These CDs are generally less widely available, and the APYs are lower. However, the additional flexibility can be worth a slight drop in rates.
Pros
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A fixed rate applies to the CD’s entire term.
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Withdrawals before the CD matures don’t incur penalties.
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If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person.
The bottom line
The Fed’s decision to hold rates steady for a fourth consecutive time was widely anticipated. Only time will reveal how banks respond to the Fed’s latest decision. In the meantime, expect savings rates to remain high. If you’re not already earning a competitive interest rate on your savings, consider locking in a high CD rate or moving your funds to a high-yield savings account to boost your interest earnings.
