Savings rates have been on a steady incline through 2022 — but the new year could look much different.
In response to record-high inflation plaguing consumer wallets, the Federal Reserve spent 2022 implementing a series of federal rate hikes. The increases, which have moved the federal funds target rate range from 0.25 – 0.50% to 4.25% – 4.50%, are designed to bring inflation down to the Fed’s standard 2% target.
In turn, banks have also increased interest rates on savings accounts. Better savings rates, influenced by the Fed’s moves, help banks (especially online-only banks with high-yield accounts) keep up with the competition.
Looking ahead to 2023, though, the Fed’s next moves are less predictable. And because high-yield savings account rates are variable (and influenced by the Fed’s target federal rates) the rate you earn now on savings may not be the same rate you’ll earn a year from now.
Here’s what experts are anticipating for the year ahead, and what it means for your savings:
What to Expect After the Final Fed Meeting of 2022
In its final meeting of the year, the Fed this week decided to raise rates once more, by 50 basis points.
In a recent speech, Fed Chair Jerome Powell teased the likelihood that this rate hike could be lower, saying “The time for moderating the pace of rate increases may come as soon as the December meeting.” And it was: the previous four Fed meetings resulted in increases of 75 basis points each.
This week’s rate hike could still result in higher savings account rates though, says Kelly Luethje, CFP, and founder of Willow Planning Group, a financial planning firm in Holderness, New Hampshire.
“I wouldn’t be surprised if they moved up a little bit,” she says. But you shouldn’t expect a large jump. “For right now, I think they will stay pretty steady.”
As for what happens next year? Many experts we spoke to shared the same opinion: we could be reaching a savings ceiling.
2023 Predictions: Savings Account Rates Could Approach a Ceiling
The Fed has signaled its plan to begin moderating the fast pace of rates hikes it has enacted this year, and some experts say banks may be more moderate in their approach to rates, too.
“I think we’re pretty close to seeing maximum interest rates for short-term savings,” says Kevin Lao, CFP, founder of Imagine Financial Security, a financial planning firm in Jacksonville, Florida.
Most banks will reach 3.5% – 4%, he predicts, with some possibly going over 4%.
Joe Bautista, Bautista Planning and Analytics, a financial planning firm in Lake Oswego, Oregon, also predicts more stagnant rates next year, because many savings account rates are still pretty low compared to the inflation rate.
Though it lags behind the Fed’s moves, the inflation rate is dropping. The latest Consumer Price Index shows inflation moving from 8.3% to 7.7% to 7.1% over the past few months. If inflation reports show higher rates are already having an effect, then the Fed may be less likely to keep increasing — and if the Fed doesn’t raise rates, banks won’t either.
Bautista points to the lowering inflation rate, as well as the Fed signaling it may hold interest rates high, and even the fact that there is plenty of cash in the economy as reasons why savings account rates may hold steady in the coming year.
However, there is still a chance for boosted savings rates in 2023, if inflation remains high and causes the Fed to increase its rate to 4.50% – 5% in 2023, says John Boyd, CFP and founder of MDRN Wealth, a financial planning firm in Scottsdale, Arizona.
Inflation is trending down, but still far from the Fed’s target.
Earning Interest With a High-Yield Savings Account
Even if today’s rates hold, there are still a lot of benefits for savers. “It’s a heck of a lot better than where we were even a year ago for yield on your cash,” says Boyd.
Let’s say you put $500 into a new savings account today with a 3.50% APY and you contribute $50 per month, you’ll have about $1,127 in a year. Although it may not seem like much, regular contributions combined with a great interest rate can add up over time. And if the rate does go up on your account, you may earn even more.
The Bottom Line
After this year’s huge leaps in savings account rates, how quickly they move may slow down in the new year. But that doesn’t mean they’re losing value. The bright side is, they’re not going down, either.
Even more importantly, a high-yield savings account is the best place for your emergency fund regardless of how high-interest rates are. You can get a competitive interest rate on your balance, have the option to make contributions over time, avoid fees, and maintain liquidity in case you need fast access to your cash.
Here are a few more things to know about savings accounts today:
- The Highest Savings Account Rate Right Now is 4.11% APY. Here’s Where You Can Get It
- The Best Savings Account Rates
- Money Market Accounts and Savings Accounts Are Very Similar. Here’s What to Know Before You Open One
- The Best Places to Save Your Money Right Now: 6 Account Types to Consider
- How Much You Should Save In a Savings Account, According to Experts — And It’s Not ‘as Much as You Can’