- The Federal Reserve’s decisions can impact the interest rate of your savings account.
- Some banks will increase savings rates more quickly than others, but there likely won’t be an increase anytime soon.
- Savers who want to be proactive about their savings can call their bank or explore other options.
The Federal Reserve increased the federal funds rate for the first time since the pandemic began last month.
If you’re a saver who’s wondering when the interest rate of your savings account will increase, here are a few things to keep in mind that may impact your savings decisions this year.
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Savings interest rates over the last five years
The Federal Reserve has several purposes: regulate banks, manage the country’s money supply, and implement monetary policy tools.
Monetary policy, as outlined in the Federal Reserve Act is meant to keep prices consistent, maintain long-term interest rates, and ensure as many Americans have employment as possible.
When making decisions about monetary policy, the
conducts meetings throughout the year to analyze how to keep inflation stable while promoting employment.
Savings interest rates dropped significantly over the last five years because the Federal Reserve wanted to address the economic effects of the COVID-19 pandemic.
The Federal Reserve reduces the federal funds rate to promote economic activity and encourage people to buy homes.
Aris Protopapadakis, associate professor emeritus of finance and economics at USC, notes that the COVID-19 pandemic was unique because the economy was quickly affected.
“The system kind of came to a grinding halt. The trick was to not break the economy while it was on standstill, meaning not to create big problems,” Protopadakis says.
While the Federal Reserve’s decision to lower rates may have helped with paying off credit card debt or loans, it also stirred a significant drop in savings interest rates.
Why does the Federal Reserve increase interest rates?
Protopapadakis says increasing the federal funds rate is a roundabout way for the Federal Reserve to regulate economic activity and combat inflation.
When interest rates rise, your finances may be affected in numerous ways. You might see mortgage rates or insurance increase.
“Companies borrow less. Individuals borrow less. Housing values don’t go up as much, and it’s harder to borrow against it. That slows down economic activity, and that slows down inflation eventually,” explains Protopapadakis.
How savings account rates are determined
Savings interest rates are affected by the Federal Reserve. When the Federal Reserve increases the federal funds rate, savings interest rates will also generally increase.
However, Lindsey Bell, chief markets and money strategist for Ally, says savings interest rates may lag compared to other financial products.
“The rates on lending products like mortgages, auto loans, and credit cards tend to move a lot more quickly than those in a savings account or CD,” notes Bell.
Bell adds that banks may also respond to federal funds rates in different ways. For example, some banks may increase the savings rates more quickly than others, depending on their amount of deposits.
When will savings interest rates go up?
While it depends where you bank, most savings interest rates are generally going to rise slowly. Bell says consumers may see CDs rise to around 2% to 2.5% by the end of 2022, and savings accounts also may increase rates throughout the year.
“If consumers are expecting that they’re going to see a massive pop in rates on their savings account over the course of this year, I would say you may be setting yourself up for some level of disappointment,” advises Bell.
Protopapadakis also says the Federal Reserve’s timing to curb inflation may also impact your savings decisions.
“If inflation is bad enough, interest rates don’t rise enough. Then people try to move out as much as they can have savings accounts and put into things that have a high return and high risk,” Protopadakis adds.
Tips for savers
If you want to be proactive about your savings this year, Maggie Gomez, CFP® professional and owner of Money with Maggie, recommends calling your bank and asking for an increase in your rate.
Gomez also suggests exploring different savings options at brokerage institutions or banks. However, before switching institutions, you’ll want to determine the amount you’ll earn in interest to see if the rate is worth it.
“If you calculate how much money you have, times the interest rate you’re going to receive, you’ll know how much money you’re going to get paid,” says Gomez. “The percentage might look good, but you have to multiply it by what you have and see if that dollar amount is worth the time.”
Regardless of what banks are currently offering, Gomez says one of the most important things to focus on is to develop the habit of saving.
“The majority of your growth is going to come from your own deposits versus any interest in any account,” advises Gomez. “Don’t be defeated by the lack of interest you’re getting. Saving money is going to be really impactful, and the more you can save, the better — even in a low rate environment.”