With No Fed Rate Increase, Will Savings Rates Grow?

Savings account rates may not increase as quickly as they have been over the past year after the Fed's decision not to raise rates.
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Can savings rates continue to rise without Federal Reserve action? Fed officials concluded a two-day meeting Wednesday and decided not to raise the federal funds rate, breaking a streak of 10 consecutive increases that started in March 2022. The target range remains 5% to 5.25%.

Since the consecutive increases started, yields on savings accounts have soared. In January 2022, the national average savings rate was 0.06%, according to the Federal Deposit Insurance Corp. The best high-yield savings rates were about 0.50% at the time.

As of May 15, 2023, the FDIC national average savings rate is 0.40%, and some of the best savings accounts earn more than a 4% annual percentage yield (APY). A few savings accounts have yields north of 5%.

But what should savers expect now that Fed officials have paused their increases? Read on to learn more about how the Fed and the federal funds rate could affect your savings rate.

Will my savings rate continue to increase?

It might. Rates certainly won’t increase as sharply as they have in the past year, but you might still see a small increase. Banks raise rates, yes, in relation to the Fed moves but also for other reasons, like attracting customers.

If you are not already earning at least 4% APY in your savings account, you might be able to increase your savings rate today by switching to an account with a higher yield.

If you are concerned that rates might fall, you could consider locking in current yields by putting your money in a certificate of deposit. This type of savings account offers a fixed rate in return for requiring you to keep your money locked in the account for a certain length of time. CDs should be used more for savings that you know you won’t need soon, not your emergency fund.

Depending on the term, some CDs are paying higher yields than even the highest-yield savings accounts. And because you’re locked into the rate when you open the CD, if rates start dropping, you’ll be covered.

You can use a CD calculator to understand how much interest you can earn for different CD terms and rates.

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Why should you try to go after a high APY?

A higher APY will, simply put, grow your money faster, no matter how much of it you have to stash away. If you keep $10,000 in a savings account with a 4% APY for two years, you’d earn $831 in interest. In an account with only a 0.40% APY, you’d earn $80.

You don’t need a ton of money upfront to take advantage of higher yields. Say you start with $20 and save $20 each month for two years in a savings account that pays a 4% APY — you’ll earn $21 in interest. That’s an extra month’s contribution, as opposed to earning only $2 in interest if your account had a 0.40% APY.

You can use a savings calculator to figure out how much you can save at different rates.

How the federal funds rate influences your accounts

The federal funds rate, also called the Fed rate, is the interest rate banks use to exchange money overnight. This rate is set by the Fed’s Federal Open Market Committee. An FOMC mandate is to control inflation, and one of the ways the committee does this is by changing the Fed rate if needed.

When there is an increase in the rate banks are charged, that gets passed on to consumers with adjustable-rate products, such as credit cards, which increases costs for borrowers. This tends to soften demand for goods and services, resulting in lower prices.

But savers stand to benefit because variable savings yields tend to rise along with Fed rate increases, explains the Consumer Financial Protection Bureau, an independent agency within the Federal Reserve System. This means rates on your savings accounts, credit cards, mortgages and other forms of credit, such as personal loans, are all affected by the federal funds rate.

The Fed’s no-change decision likely means no large rate moves for the moment. But whether rates go up, down or remain the same, having your money in a high-yield savings account or CD means your balance will continue to benefit from growing at the best rates possible.

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