Interest rates are still going up — as the Federal Reserve made clear this week when it announced another federal rate hike. Now, rates are higher than they’ve been in over a decade.
The Fed’s latest interest rate increase means that debts, from mortgages and home equity loans to credit cards, are going to get more costly. But the good news is that rates on your deposits, including money stored in high-yield savings accounts, will go up, too.
As long as the Fed continues to try and reduce high inflation, experts say we can expect more federal fund rate increases through the end of this year and beyond. But what exactly does that mean for your savings account?
Savings rates don’t immediately rise with an increase in the federal funds target range, but savings account rates are tied to the Fed’s actions. Since the Fed started raising rates in March, average APYs on the high-yield accounts we track have gone from an average of about 0.5% to more than 2% APY.
To understand more about how that trend may continue, we asked four experts to predict how high savings account rates may go by the end of the year:
How Much Savings Account Rates Will Increase in 2022
Most high-yield savings accounts will have higher rates when the year ends — the experts we spoke to agree that we’ll see rates on many high-yield accounts around 3% APY.
“To think that they will go to 3% should be pretty reasonable by the end of the year,” says Ian Wild, a certified financial planner and founder of All-Pro Advisors, a financial planning and investment management firm in Pittsburgh, Pennsylvania.
Savings accounts ranging between 2.5% – 3% by year-end is the prediction Ayesha Selden, a certified financial planner and franchise owner of Ameriprise Financial Services Inc. in Philadelphia gave, too. “Which is huge,” she says. “We haven’t seen savings accounts with rates north of 1% in years.”
Because rates don’t rise alongside the Fed’s decisions, though, savings account rate increases may not reach as high as the Fed’s target rate. After the most recent hike, that target is 3%-3.25%, and will likely go up when the Fed meets again later this year. But banks are in competition with each other, so they move rates at a similar rate and frequency, and many banks are reluctant in case the Fed stops raising interest rates, Wild says.
In a slightly more conservative estimate, for example, Nia Gillett, a paraplanner for Gen Y Planning, a financial planning firm, says “I wouldn’t be surprised if they hiked up to 2.5%.”
“Just by looking at how they’ve increased over the past six months and then with the recent Fed raise, I think [banks] will follow suit and raise, as well,” says Gillett.
Still, “savers will experience an upside in terms of the interest,” Alvin Carlos, certified financial planner and founder of District Capital Management, a virtual financial planning firm, recently told NextAdvisor, regarding the Fed’s latest rate hike. “I wouldn’t be surprised if, by the end of the year, we’re gonna see rates in our bank account somewhere between 2.5% to 3%,” says Carlos. “It’s probably going to go up further as rates continue to climb,”
How to Take Advantage of Rising Savings Rates
Regardless of how much rates move in the future, one thing is clear: interest on high-yield savings accounts are improving. Sticking to a traditional savings account — which lags far behind, with rates still near-zero — won’t do much to add to your balance in the current rising rate environment.
If you’re looking for a new account, start by comparing options that fit your goals. Online banks and credit unions typically have higher rates than large brick-and-mortar institutions. Before opening any new account, pay close attention to terms and conditions, including minimum balances and fees that could cost you money over time. “Read between the lines and don’t be lured by a great rate,” says Selden.
But also remember that the most important thing you can do to build your emergency fund and prepare to weather an unexpected expense or period of instability is start saving.
Any high-yield savings account can be a safe, reliable tool to navigate these “funky, turbulent times,” amid still-high inflation and rising recession concerns, Gillett says, as long as you choose an FDIC-insured account that’s accessible to you, and make regular contributions that build up your balance over time.
Whether your savings interest rate is 2.5%, 3% or even closer to 4% by the end of the year, contributing to your savings regularly and building up a balance that helps you feel more secure in the face of uncertainty is the smartest move to make right now.