The interest rate on many high-interest savings accounts has risen steadily over the course of 2022.
- The interest rate on your savings account is influenced by the actions of the Federal Reserve.
- The Federal Reserve is raising the federal funds rate to fight inflation.
- When the Federal Reserve raises interest rates, the interest on your savings account tends to rise as well.
If you bank with an online institution, you may have received an email or message from your bank that the interest rate on your high-interest savings account is going up.
Why this happens? We explain why your savings account may be offering a higher interest rate than before.
How the Federal Reserve is affecting savings accounts
The Federal Reserve is the central banking system of the U.S. It is in charge of making decisions about monetary policy.
The Federal Reserve uses the federal funds rate – the interest rate banks use when they lend money to each other – as a tool to regulate economic activity.
When the Federal Reserve raises the federal funds rate, it affects interest rates on bank products like mortgages and savings accounts.
"The pros are, if you are a recipient, you may see higher interest rates on your high-interest savings. If you're a borrower, it costs more money to borrow, whether it's a student loan, car loan or credit card, or mortgage," says Marguerita Cheng, CFP® expert, RICP and chief executive officer at Blue Ocean Global Wealth.
The interest rate on a high-yield savings account fluctuates and is not fixed. So if you open a high-interest savings account, it's normal for the interest rate to rise or fall over time.
Why savings rates are rising?
Savings rates are on the rise due to recent Federal Reserve decisions. The Federal Reserve has raised interest rates several times in 2022 to fight inflation.
"They are tightening monetary policy," Cheng explains. "One way to counter inflation is to tighten, and that means raising interest rates to make it more expensive for people to borrow money. It's their main job to control inflation without plunging the economy into a serious recession."
When the Federal Reserve raises interest rates, the interest on your savings account generally goes up. When the Federal Reserve lowers interest rates, savings rates usually fall as well.
High-interest savings accounts and online CDs, in particular, are paying higher interest rates now than in 2021 or early 2022. The national average annual interest rate across all types of savings accounts has also slowly increased this year. According to the FDIC, the average savings account pays FDIC National Deposit Savings Rates.
Quick tip: If your bank has not yet offered a higher APY or is offering new customers a higher interest rate on a high-interest savings account, you may be able to contact your bank and request a rate increase.
What to do with my savings now?
Cheng says anyone – whether you just graduated from high school or are currently retired – can use a combination of saving and investing for your short- and long-term goals.
If you're worried about inflation, Cheng recommends saving just enough money for everyday needs or emergencies.
"We need cash for emergencies or opportunities," Cheng says. "But you don't want to have too much money in cash. Because you can see that even with high-interest savings, the growth rates on your cash are still below inflation. In other words, inflation is growing faster than." Your Cash."
A high-yield savings account can always be useful for short-term financial goals, like buying a car or saving for a vacation. It can also be used to hold an emergency fund – financial experts recommend having at least three to six months' worth of expenses easily accessible in an account.