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When we rang in the new year in January 2022, we were coming off three full years of no rate increases from the Federal Reserve. And it showed in our savings accounts, where some of the best rates were really low, barely reaching half a percent annual percentage yield.
A lot can happen in a year.
In response to inflationary economic conditions, the Federal Reserve increased the federal funds rate multiple times throughout the year, clocking in at seven increases through December 2022. Now, the best high-yield savings accounts are earning upward of 3% APY. Here’s a recap of how rate increases impacted bank accounts, and what to expect for 2023.
What do the federal funds rate increases mean?
With a higher federal funds rate, interest rates increase on loans and borrowing on credit (like carrying a balance on a credit card), making them more expensive. But many bank deposit accounts, including savings accounts and certificates of deposit, are seeing solid benefits. Whereas some of the best savings accounts earned 0.50% APY before, they’re now closer to 3% APY or more.
Higher rates mean you earn more money in interest on your savings. If you had deposited $10,000 in an account in January 2022 that earned 0.50% APY (really, that was among the best you could find), and that rate had stayed the same through the year, you would have earned about $50 by the time you checked your account in January 2023.
But now, if you place that $10,000 in an account that earns 3%, you would earn more than $300 in 12 months' time (provided the rate stays the same). You can use a savings calculator to come up with more scenarios, especially ones in which you contribute to your savings on a monthly basis.
CDs saw a similar growth pattern with rates. Looking at the historical rates for CDs, you can see that the best CDs now have a much higher yield than they had when we ushered in 2022.
Will the Fed raise rates in 2023?
No one can predict for sure, but the Fed is giving us clues as to what it might be doing with monetary policy in the near future. In fact, the Federal Reserve chair has indicated that there may be smaller rate hikes going into the new year.
I recently chatted with René Nourse, a certified financial planner and founder and CEO of Urban Wealth Management in El Segundo, California.
She says there may be smaller rate increases because the rate of inflation may be slowing.
The consumer price index, which is often used as a proxy for inflation, bears out this hypothesis. According to the Bureau of Labor Statistics, the CPI increased 9.1% year over year for June 2022, but by November the increase was a more moderate 7.1% — not exactly low, but off its June peak and with smaller increases each month.
Rates increased because the Fed made moves to help fight inflation. If inflation falls to levels that are within the Federal Reserve target, rate increases may stop, and it’s not entirely out of the picture for rates to eventually decrease, Nourse says. “You’ll want to prepare for either scenario,” she says.
What can you do now to take advantage of current rates?
Make sure your savings account is earning today’s high rates. That means shopping around for an account that has high yields and, ideally, no monthly fee.
I've noticed that the best high-yield savings accounts tend to offer great rates when yields are high and also tend to be among the most competitive when rates decrease. So finding a good savings account now can help set you up for success no matter what happens with interest rates.
If you have a chunk of cash set aside that you won’t need for a while, consider putting it in a CD to get a guaranteed rate. Some of the top CDs earn rates that are higher than even the best savings rates. Yes, you’ll have to agree not to withdraw the funds for a set time period, say, for a year, and you might miss out on a higher interest rate. But if rates fall in 2023, which isn't out of the question, you'll have locked in a high rate. And regardless of whether rates increase or decrease, you’ll know what your yield will be.
This year saw a large increase in interest rates. If you’re a saver, that’s good news. It’s unlikely that yields will continue to increase at as rapid a pace in 2023, however. But by keeping your funds in high-yield savings accounts and CDs, you can make sure your money is still working hard for you well into the new year.