The Federal Reserve just announced its sixth consecutive big interest rate hike, bringing the target federal funds rate range to 3.75%-4.00%.
After raising the target federal funds range by more than 3% since March, the Fed is still working to bring down runaway inflation. Rising prices are holding steady, with the latest Consumer Price Index (CPI) showing an 8.2% increase in the cost of everyday expenses year-over-year. While that’s lower than the months prior, it’s still a very high inflation rate.
But the Fed’s commitment to more rate hikes also has experts concerned about an economic downturn. Both a “poor investment market and a recession,” could impact American wallets over the next 12 months, Derek Delaney, certified financial planner and founder of PharmD Financial Planning in Owatonna, Minnesota, recently told NextAdvisor.
For savers, those broader economic changes do have a silver lining: higher interest rates on savings accounts. The average APY on high-yield savings accounts has gone from around 0.50% to 2.50% this year — and as long as the Fed keeps raising rates, experts say savings account rates will move up, too.
What’s less clear is just how high rates will go.
When we asked experts for their savings rate predictions a few months ago, many made conservative estimates of around 2.50% to 3.00% APY. Those predictions have come and gone, with the average high yield savings rate at 2.73%, and multiple accounts on our list of the best high yield savings accounts offering above 3.00%.
We’ve been tracking the savings account rates of dozens of banks in recent months and decided to analyze the data to see how high rates might go if current trends continue. Then we shared our analysis with experts for their take, along with their own predictions.
Here’s what we found:
NextAdvisor’s Analysis of Savings Rates Trends
We track and monitor interest rates regularly to help you decide the best places to keep your cash. This gives us a unique position to spot trends in how banks raise rates.
Since the Fed rate hike in mid-July, our analysis shows that interest rates among the top high yield savings accounts have increased an average of 4.5 times at a rate of 0.28%. In other words, high yield savings rates have increased by 1.26% on average in the past three months.
The chart below shows just how steep this trajectory has been:
If that trend continues — which assumes online banks keep raising their rates as the Fed announces more rate hikes — the top high yield savings accounts could earn an average 3.75% APY by January of next year.
Federal interest rates determined by the Fed haven’t crossed the 4% threshold since 2007, which was before nearly all of the online high yield savings accounts we track even existed. So while interest rates could go that high in theory, it’s difficult to predict exactly how high online banks are willing to raise rates to remain competitive with each other — which experts say is the main driver behind these rising rates.
Here’s what experts say:
How High Will Savings Account Rates Go?
Changes in savings rates are getting more and more interesting after each rate hike, says Cory Moore, certified financial planner and founder of Moore Financial Planning.
So far, rate hikes have had the biggest impact on high yield savings accounts, which are typically offered by online banks or online divisions of larger banks. Traditional savings accounts are still very low, and many only offer 0.01%. The Federal Deposit Insurance Corporation (FDIC)’s index of national depository rates for savings accounts has only moved from 0.06% to 0.21% between March and October. This index tracks both high-yield and traditional savings accounts.
As a result, high-yield savings accounts are where experts expect to see the biggest changes through the rest of this year. However, they have different views on just how much rates will rise:
Savings account interest rates over 4%
With two Federal Reserve meetings left this year, savings account rates will continue to increase for the rest of the year.
“We could very easily hit 4% by the end of the year, and that’s probably not the ceiling either,” says Greg McBride, CFA, chief financial analyst at Bankrate. Like NextAdvisor, Bankrate is owned by Red Ventures. “The Federal Reserve is going to be forced to raise interest rates until we see some moderation in inflation.”
“I would have to agree that you could definitely shop around and find a 4% rate by the end of the year,” says Moore. But he also adds that a rate that high could be rare, with most accounts lagging behind.
Savings rates lag behind federal rate changes
Other experts are less bullish on ending the year with rates much higher than today.
Right now, many high yield savings accounts earn between 2% and 2.5% APY, while the federal funds target rate range is 3% to 3.25%. Even if the Fed raises rates above 4% by the end of the year, some experts argue there will still be a gap.
“Savings rates lag, and they don’t usually increase as much. It’s not a percent-by-percent basis,” Denise Downey, a certified financial planner and founder of Financial Trex, a financial planning firm.
Savings rates could reach 3% by the end of the year, says Downey. “But I would be surprised if I saw them higher than 3%.”
Savings rates tend to lag behind the federal funds rate by 0.25% to 0.50%, says Andrew Tudor, certified financial planner and founder of Alchemist Wealth, a financial planning firm. “Banks don’t typically raise their rates quickly because they still want to earn interest, while keeping new and existing customers happy with competitive savings rates, he says.
Plus, they want to give themselves a bit of wiggle room in case the Fed pulls back on rate hikes next year. “It can be a tough situation for a bank to flash a high interest rate, and then as rates decline, they start taking those [high rates] away,” says Tudor. “I would expect that they would continue to rise 0.25% to 0.50% before the end of the year to get closer to 3%.”
Another reason some experts are skeptical of savings rates topping 4% this year is that many banks won’t choose to pass on all of the profits from higher interest rates on loan products to savings customers. That’s more difficult if they offer savings account rates just as high as the federal funds rate.
“Even the best of the high-yield savings accounts are going to keep some of [those profits]. You’re not going to be able to earn exactly on your cash what [banks] can earn on their cash,” says Conor Feldmann, CFA and portfolio manager for Commas, a financial advisory firm.
Feldmann doesn’t expect savings rates to reach 4% by the end of the year but is hopeful that they will at some point next year.
Interest Rates and Inflation in Balance
While competitive rates can be useful for boosting your savings balance, they also make borrowing more expensive. And even at 4% APY, if inflation remains near record highs, your dollars are still losing value in savings.
If the Fed stops implementing rate hikes too early, but inflation continues to rise, that could lead to bigger problems with inflation that require more aggressive rate increases to solve, says Feldmann.
“Rates going high is certainly the best news savers [have] had in a long, long time. But for these yields to really shine, we need inflation to come down,” says McBride. “That’s where all of a sudden, the 3%, 4%, and maybe 5% returns start to look a lot better.”
In 2007, high-yield savings account rates were around 6%, while inflation was around 3%, says McBride. By contrast, current high-yield savings account rates are around 3% while inflation was at 8.2% in September.
We still have a long way to go before savings rates fully catch up to inflation and the real yield on your savings is positive — but for now, keeping your cash in a high-yield savings account is still one of the best ways to hedge against inflation while building an emergency fund for periods of economic downturn or financial hardship in the future.
Now’s a good time to put your money into a high-yield savings account or another interest-earning account. You can boost your savings further by contributing whatever amount you can regularly, and simplify the process with automatic transfers to your account. Just make sure that you pay attention to the fees, transfer options, and minimum balance requirements to choose the account that’s best for you.