What the November Fed Rate Increase Means for Your Bank Accounts
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Your savings account rate might change for the better this November. The reason? The Federal Reserve raised the federal funds rate by three-quarters of a percentage point, or 0.75%, on Nov. 2, marking the sixth increase of this rate in 2022.
After a Fed rate increase, banks and credit unions tend to raise rates on savings accounts and certificates of deposit. But rate changes vary widely by institution, and there’s no guarantee you’ll see a rate bump. Here’s what to know about the November Fed rate and a recent look at which types of bank accounts have seen the highest rate changes.
Basis points and higher savings rates
As the U.S. central bank, the Federal Reserve — or the Fed — is responsible for keeping the economy steady and growing. One of its tools is the federal funds rate, or Fed rate, which is the cost to borrow cash overnight between banks. The Fed raises the rate to help curb inflation.
The amount of a Fed rate increase is measured in basis points. A basis point is one hundredth of 1%, or 0.01%. So this most recent increase is 75 basis points, or 0.75%. The latest increase brings the Fed rate into mid-3% territory.
A Fed rate increase makes borrowing more expensive for banks and consumers, but one silver lining is that banks typically raise rates on savings accounts and newly issued CDs, too. Learn more about the Fed rate’s impact on savings accounts.
» RELATED: Read about the 2022 Fed rate increases
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Some bank accounts see better rates …
Three types of bank accounts will generally have higher rates following a Fed rate bump: regular savings accounts, CDs and money market deposit accounts. Checking accounts, on the other hand, don’t always earn interest. And when they do, they rarely have rate increases like the others.
Here’s a look at four national average rates at banks for two months: in March — the month of the Fed’s first rate increase this year — and in October, after several Fed rate increases.
Account type | March 2022 national average rate | October 2022 national average rate | Difference |
|---|---|---|---|
CD for a 1-year term | 0.15%. | 0.71%. | 56 basis points (0.56%). |
Money market account | 0.08%. | 0.23%. | 15 basis points (0.15%). |
Regular savings account | 0.06%. | 0.21%. | 15 basis points (0.15%). |
Interest checking account | 0.03%. | 0.04%. | 1 basis point (0.01%). |
Source: Federal Deposit Insurance Corp. | |||
Regular savings accounts and money market accounts have comparable rates, but the latter tend to have higher minimum balance requirements. CDs have the highest yields but also the most restrictions: A CD locks in a fixed rate for a set time, and you can’t withdraw or add money to a CD until a term ends. If you break a CD early, there tends to be a penalty. See more about CDs and how the Fed rate affects them.
… and where you bank matters too
The national average yields are far from the best you can get. Online banks and online credit unions have increased their rates on high-yield savings accounts and CDs dramatically this year alone. You can find accounts with yields above 3% annual percentage yields, and some CDs with five-year terms have reached 4% APY.
What’s more, these online banks and credit unions are among the first banking institutions to raise rates after a Fed rate increase, a trend NerdWallet has observed.
“If the Fed continues to raise interest rates, bank rates can be expected to move higher,” but “often with a lag,” Sayee Srinivasan, chief economist at the American Bankers Association, said in an email. “Banks saw a surge in deposits due to government stimulus programs to combat the impact of the pandemic, and those deposits just recently started to decline.”
When banks need more deposits, they traditionally raise their savings rates. But not all banks respond equally. The three biggest national banks still have the lowest possible rate — 0.01% — on their basic savings accounts. And most of their CD rates aren’t much better.
The economy has changed enough in the past year that you may want to revisit your savings strategies, which can include considering a high-yield savings account or CD or both, says Dana Twight, certified financial planner and owner of Seattle-based Twight Financial Education.
Are more Fed rate increases coming?
The short answer: most likely. In its September press release, the Fed anticipated that “ongoing increases” to the Fed rate “will be appropriate.” The next time the Fed is expected to decide on an increase is at its Dec. 13-14 meeting.
And experts think more rate increases are on the horizon.
“In its September forecast, ABA’s Economic Advisory Committee, comprised of chief economists from major banking institutions across North America, expected the Fed to continue raising interest rates until the first quarter of next year before potentially lowering rates through the end of 2023,” Srinivasan said in an email. “Everything depends on the ability of the Fed to bring inflation down.”
On a similar note...
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