What a Fed Rate Increase Means for Savings Accounts

Interest Rates and The Federal Reserve at Sunset stock photo
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It’s been a busy year for rate hikes. The Federal Reserve has raised interest rates seven times since March, surging from a targeted range of 0.25% – 0.5% to 4.25% – 4.5%.

This likely has you wondering what a Fed rate increase means for savings accounts. Chances are, your money hasn’t been earning much interest in recent years, so you’re probably hoping that will soon change.

Current Federal Funds Rate

In December, the Federal Reserve raised the overnight borrowing rate half a percentage point, bringing it to a targeted range between 4.25%-4.5% — the highest level in 15 years. This will likely affect you personally, as banks and credit unions typically raise rates on savings accounts and certificates of deposit after a Fed rate hike.

Interest Rates and Inflation

Consumers have been plagued by inflation in 2022. In fact, inflation rates have soared to levels that haven’t been realized since the early 1980s.

In November 2022, the Consumer Price Index for all items was 7.1% — before seasonal adjustment. Ultimately, the Federal Reserve is working to gradually return inflation to 2%, but this will take time. To achieve this goal, the Federal Open Market Committee expects to institute ongoing rate hikes, according to its December 2022 statement. As the economy currently stands, no rate cuts are expected in 2023.

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Essentially, the Federal Reserve is responsible for keeping prices stable, so committee members are raising rates to lower inflation. This isn’t the best news if you’re planning to take out a mortgage in the next year, but it can help you earn more interest on your savings account.

Will Savings Rates Go Up if the Fed Raises Rates?

If you’re wondering how the Fed’s rate hike will impact your savings accounts, you’re not alone. Theoretically, putting your money in a savings account is a great way to rack up interest earnings. However, in recent years, rates have been so low, you might not have actually earned much.

So, what do rising interest rates mean for savings accounts? Technically speaking, nothing. The Fed doesn’t set consumer interest rates, so the latest rate hike might not affect your savings account.

The good news is, rate increases typically affect the economy as a whole. This includes rates offered on savings accounts. Banks set their own rates on savings accounts, but they need to remain competitive to attract and retain customers. Therefore, they have a major incentive to offer higher interest rates.

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However, since a Fed rate hike doesn’t automatically lead to an increase on savings account rates, it can take weeks or even months for a bank to raise its rates. So, does the Fed interest rate affect savings? Yes, indirectly.

Is It Better To Have Higher or Lower Interest Rates on a Savings Account?

When it comes to savings accounts, the higher the rate, the better. This can be a bit confusing, because when borrowing money, you typically want to seek out the lowest rate possible. However, when you put your money in a savings account, you’re essentially allowing the bank to borrow from you. In return, they pay you interest. Therefore, the higher the interest rate, the more money you earn.

Interest on the balance of your savings account will be compounded daily, monthly or quarterly. The more frequently it’s compounded, the more money you’ll earn.

Is Now the Right Time To Open a New Savings Account?

Determining what a Fed rate increase means for savings accounts is especially important if you’re planning to open one in the near future.

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If you don’t currently have a savings account or your bank isn’t offering competitive rates, you might be interested in opening a new account. Deciding where to put your money is a big deal, so you want to find a financial institution you feel confident staying with for the foreseeable future.

Potential Future Rate Increases

Since rates have been steadily rising, you’re not sure if now is the best time to open a new account or if it’s worth waiting. Inflation is expected to slow to 4.5% in the first quarter of 2023 and 3.5% in the second quarter of the year, according to the Federal Reserve Bank of Philadelphia’s Fourth Quarter 2022 Survey of Professional Forecasters.

In November, Federal Reserve Chair Jerome Powell said the committee planned to start slowing the pace of interest rate hikes. He stayed true to his word, raising rates half a point in December, following four consecutive three-quarter point increases.

When To Open a Savings Account

The right time to open a savings account is a largely personal decision. However, if you’re basing your decision on interest rates, now could be a good time to make your move.

Currently, the national average annual percentage yield on savings accounts is 0.24%, according to the FDIC. However, GOBankingRates has identified several banks offering savings account interest rates ranging from 3.00% – 5.00%, as of December 2022.

Maximize Your Interest Earnings

While a Fed rate hike doesn’t necessarily increase savings account interest rates, it can definitely help. Since rates are currently at a 15-year high, this might allow you to score a seriously competitive savings account interest rate.

Now that you know what a Fed rate increase means for savings accounts, you can make an informed decision about what to do with your money. If you don’t have a savings account, now is a great time to shop around and find a financial institution that offers competitive rates — and terms.

Even if you do currently have a savings account, it can be worth it to check rates at other banks and credit unions, to make sure you’re getting the most from your money. Remember, earned interest is essentially free money, so trying to score the highest possible rate makes sense.

When Fed rates start to go down again, savings account rates can follow suit. Therefore, scoring a competitive interest rate as soon as possible will allow you to maximize your earnings.

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Information is accurate as of Dec. 30, 2022.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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About the Author

Jennifer Taylor is a West Coast-based freelance writer with more than a decade of experience writing about anything and everything. Since earning her MBA, personal finance has been her favorite topic, as she’s passionate about writing stories that educate, inform and empower. Specifically, she specializes in budgeting, debt repayment, savings and retirement.
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