The Federal Reserve’s December Federal Open Market Committee meeting ended with a third consecutive pause on rate hikes, a move highly anticipated by experts. For now, rates on high-yield savings accounts and certificates of deposits will remain elevated heading into 2024.
In today’s elevated rate environment, you can find many banks or credit unions that offer savings accounts and CDs with annual percentage yields, or APYs, of 5% or more. Most experts agree that savings APYs have hit their peak. Since the Fed has held its final meeting of the year, we’ll see how banks respond to this decision as 2023 winds to a close. 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 Dec. 13, 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 — 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 0.1% in November, according to the US Bureau of Labor Statistics. That put annual inflation at 3.1% for the past 12 months — 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. When interest rates increase, 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 Bankrate, CNET’s sister site.
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.
How high will rates go?
Most experts believe that we’ve likely reached the top of the market for deposit account rates. “Interest rates are unlikely to rise much further, but we could witness cuts next year,” said Harry Turner, founder of The Sovereign Investor.
The Fed also hinted at rate cuts next year, though Chair Jerome Powell noted the Fed will be prepared to react based on economic changes. “The economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured,” said Powell, at a Dec. 13 press conference. “We are prepared to tighten policy further if appropriate.”
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.”
Since it’s likely that rates are at peak highs, purchasing a CD or moving your savings 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],” wrote Baruch Silvermann, CEO of The Smart Investor, 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 one- to five-year CD terms have risen to APYs as high as 5.5% or more. 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 0.46%, 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 announcement to hold rates steady for a third consecutive time was again 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.
