The Federal Reserve Wednesday kept its key interest rates at the same elevated levels as it’s had in recent months — and that’s good news for savers.
As the Fed’s target rates have climbed to their highest point in 22 years, interest rates on savings have also been increasing steadily. Those rates are expected to continue, according to Ken Tumin, founder and editor of DepositAccounts.com, which tracks rates.
So far in 2023, the average online savings account yield has gone up from 3.31% to 4.39%. The increase is nearly identical to the Fed’s lifting interest rates 1 percentage point this year.
A year ago, the average interest rate was 1.81% and two years ago, 0.45%.
The two-year spike means consumers can earn an additional $394 more annually than in 2021.
In addition, money market mutual funds from brokerage firms have not only followed the Fed’s path, but have climbed somewhat faster than online account rates.
Has the Fed helped consumers?
The Fed has increased the target federal funds rate, its key rate, to a range of 5.25% to 5%, its highest level since 2001, in an effort to ease inflationary pressure.
Though it held rates steady Wednesday, it suggested more increases could come later this year.
The Fed said in a statement it “will continue to monitor the implications of incoming information for the economic outlook” and would be “prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the (Fed’s) goals.”
The cost of living peaked at an annual rate of 9.1% in June 2022, the largest increase in 40 years. The increases have since slowed,and the annual rate was 3.7% last month.
Not all the news is bright for consumers. Traditional savings accounts at “brick and mortar” banks are averaging 0.45%. In California, banks have been paying as low as 0.04%. But there are deals available on certificates of deposit.
“California banks, like banks in other parts of the nation, have raised CD rates much more than savings account rates,” Tumin said.
Rates are as high as 5.75% for savers in the Sacramento-Stockton-Modesto region, according to data from DepositAccounts.com. Terms and minimum balances vary.
The 5.75% applies to banks and credit union with branches in the Sacramento-Stockton-Modesto region.
Rates can be particularly higher on CD specials, which often require new money or a checking account accompanying the CD.
“Brick-and-mortar banks often pay much higher rates on CD specials than on their standard CDs. Today, the difference between the rates of CD Specials and standard CDs is especially wide,” said Tumin.
Lower bank rates
The bank offering 0.04%, for instance, offers seven and 13-month CDs paying a 5% annual percentage yield and requiring a $1,000 minimum.
Saving account rates are often low because “many deposits are in checking accounts, and checking account customers tend not to watch rates as closely as some investors.
Banks often raise rates selectively, looking for new customers and those who follow interest rates closely.
“Many banks had invested heavily in long-term bonds in their portfolios and were hurting on paper by higher interest rates. Therefore, most banks raised their savings rates selectively to maintain their old customer base and also attract new customers,” said Tenpao Lee, professor emeritus of economics at Niagara University in New York.
Banks have generally focused on CD specials with rates closer to the federal funds rate, Tumin explained.
Banks also tend to be more active lenders. With loan rates much higher than the interest rates–fixed rates on a 30-year mortgage last week averaged 7.18% according to Freddie Mac–the banks can earn more.
The longer a consumer is willing to put their money into a certificate of deposit, the higher the rate.
The average online one-year CD is up to 5.1% from 4.37% at the start of this year, 2.67% from a year ago and 0.46% from two years ago. Terms and conditions vary.
That means a $10,000 CD would earn a consumer an additional $464 in annual interest.
Invest the money for five years in a CD, and the rate is averaging 3.95%, down slightly from 4.04% on January 1. That’s because the financial world anticipates that in the future, rates will start to come down.
Still, today’s average is up from 3.15% one year ago and 0.68% two years ago. That means a $10,000, five-year CD would yield an additional $327 in annual interest.
Among California banks with local branches, rates are as high as 5.05% for some CDs.
In the future, Lee said, the Fed is likely to hold interest rates at current levels briefly and then raise them again.
As a result, he said, “savings rates are likely to be higher at the end of the year and early next year. Consumers need to shop savings rates carefully to take advantage of the new economic phenomenon.”