What Fed Rate Increases in 2023 Mean for Savings Accounts
It’s 2023 and the Federal Reserve just announced a 0.25% hike in interest rate spreads. This is after seven rate hikes in 2022. This increase brings the target fund interest range to 4.5% to 4.75%. That rise is smaller than some of the steep moves in 2022, but a further rise means rates are at their highest since 2007, when the target last hit 4.75%.
All of the recent rate hikes mean that loans and credit card balances are more expensive. But if you have a savings account or a deposit slip, you could benefit. Here’s a look at what the recent rate hike could mean for savings accounts in 2023.
Savings accounts: 3% APY or higher
As of early 2022, some of the best savings accounts were earning an annual percentage return of just 0.50%. Today, the best savings accounts are earning more than 3% APY, and some of the top high-yield savings accounts are as low as 4% APY.
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That’s a big jump for a year. With the Federal Reserve’s recent announcement calling for a smaller hike compared to most rate hikes in 2022, don’t expect APYs nearly 8 times higher. However, you may still see returns that are a bit higher and more accounts can hit the 4% figure.
In particular, look out for high-yielding online savings accounts, which tend to offer some of the highest interest rates.
On the other hand, savings accounts at some of the largest national banks have interest rates as high as 0.01%, despite the multiple rate hikes by the federal funds over the past year. These rates fall short of the national average savings rate, which the Federal Deposit Insurance Corp. is 0.33% on January 17, 2023.
If you have a savings account with a below-average interest rate, it might be worth looking for a savings account with 3% to 4% APY.
Save for the future
One of the reasons the Federal Reserve has raised interest rates is to fight inflation. Last year’s efforts seem to be working. According to the US Bureau of Labor Statistics, the consumer price index, which is often used as a measure of inflation, rose 6.5% year-on-year in December 2022. While this number is relatively high compared to previous years, it is lower than earlier this summer when CPI was 9.1% year-on-year in June 2022. If inflation falls within the Federal Reserve’s target range in the coming months, rate hikes could end.
It is all the more worthwhile now to build up an emergency fund on a high-yield account. Nobody can predict the future, but a strong savings account can help you weather a financial storm.
Having three to six months of your expenses in the form of savings is ideal, but that’s a lot. If you haven’t already saved that much, you can build it up over time in amounts that are manageable for you.
Let’s say you get a paycheck twice a month and you can save $50 every payday. You’ve saved over $600 in six months, and that can help when you’re in financial distress. If you deposit this money into an account with a high interest rate, you can grow your money.
The difference of a high-yield savings account
Where you keep your savings can affect your balance. If you put your $600 emergency fund in an account with 0.01% APY, like those offered by many of the largest national banks, and you didn’t make any additional deposits, it would earn just 6 cents overall after a year. But if that money was in a high-yielding savings account earning an annual interest rate of 4.00%, the balance would increase by more than $24 over the same period, even if you didn’t make additional deposits. That’s a win for simply choosing a better savings account.
You can try your own calculations with NerdWallet’s savings calculator to see what your savings could yield.
Fed rate hikes will continue into 2023 – until now. Take advantage by investing your money in a high-yield savings account. You’ll get better interest rates than a regular savings account, and you’ll be better prepared for any financial situation that may come your way.
What Fed rate hikes in 2023 mean for savings accounts originally appeared on NerdWallet.