The Federal Reserve just handed down its third consecutive 75-basis-point interest rate hike to fight inflation, making it more expensive to borrow money for things like homes and cars. However, there is a silver lining. Rock-bottom interest rates on so-called high-yield savings accounts are finally starting to be higher-yielding, presenting an opportunity to help you offset inflation.
High-yield savings accounts, typically offered by online banks, provide higher compound interest rates than traditional savings accounts, allowing savings to grow faster. The amount of money you earn over the course of a year, known as the annual percentage yield, or APY, is directly affected by Federal Reserve federal funds rate hikes, CNBC reported.
About a year ago, high-yield savings accounts had APYs close to 0.5 percent. Now you can find accounts that offer APYs of more than 2 percent. That’s far more than traditional savings accounts, which currently offer average interest rates around 0.13 percent, according to Bankrate.
“That sucking sound? It’s coming. And it will be cash leaving high-beta funds to be parked in savings accounts soon to yield 4%,” Bloomberg Media Senior Editor Edward Harrison predicted in a tweet. “The funny thing is ALL the high beta stuff is rallying like crazy today as people reverse their pre-FOMC positioning. It’s a week or month down the line when we will see the real action.”
Before joining Bloomberg in 2021, Harrison founded and was managing editor of Global Macro Advisors. He also worked in corporate development at Yahoo.
Interest rates could go a lot higher, as could yields from savings accounts.
Federal Reserve Chair Jerome Powell said Wednesday, Sept. 21 that the Fed plans to keep at its battle to beat down inflation, signaling that borrowing costs will keep rising this year.
While the inflation rate dropped slightly in August to 8.3 percent after a 40-year historic high of 9.1 percent in June, the rate is still more than four times higher than the Fed’s 2 percent target.
New projections show the Fed’s target policy rate rising to the 4.25-to-4.50 percent range by the end of 2022 and ending 2023 at 4.50-to-4.75 percent. That’s a faster pace and higher than expected, and is expected to accompany a slowing economy with unemployment rising to a degree historically associated with recessions, Reuters reported.
“Inflation is public enemy no. 1. It’s easy to raise rates when interest rates are low,” said Bankrate Chief Financial Analyst Greg McBride. “[It] becomes a lot tougher if unemployment is moving up. That’s why you’re seeing them front-load as much as they can now.”
After keeping rates “depressingly low” since the pandemic, some banks have started offering higher payouts on savings accounts, wrote Bloomberg opinion columnist Alexis Leondis.
From August to September, the average online savings account yield had the biggest monthly gain in at least five years, according to Ken Tumin, founder of DepositAccounts.com. Tumin said he expects many high-yield savings accounts, many of which are currently paying more than 2 percent, to climb higher than 3 percent.
“You should reconsider the bank you use, at least for some of your savings,” Leondis wrote. “Chances are, if you’re a customer at one of the major retail banks, you’re leaving real money on the table.”
However, there’s no guarantee the biggest traditional banks will increase payouts to savings account holders. Interest rates for savings accounts aren’t really regulated, Leondis wrote. “It ultimately comes down to how badly a bank wants your money. Right now the average for all banks, many of which are brick and mortar, is 0.13%.