You could be paid more out of your savings.
- Interest rate hikes by the Federal Reserve have led to higher savings account rates.
- If these rate hikes continue, savers could benefit.
Inflation has been torturing consumers for over a year now, to the point that many people have had no choice but to rack up expensive credit card debt just to pay bills and put food on the table. on the table. The Federal Reserve, however, is doing its part to remedy the situation.
The Fed has already implemented several large interest rate hikes in an effort to slow inflation. By making borrowing more expensive for consumers, it is hoped that spending will decrease enough to allow supply to catch up with demand. Once that happens, inflation should start to cool.
That said, higher borrowing rates aren’t exactly a good thing for consumers. But there is a silver lining here, and that is that the Fed’s interest rate hikes have also led to higher interest rates on savings accounts. And there’s reason to believe that this trend could continue into 2023.
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Will savers earn even more next year?
Let’s get one thing clear before we go any further. The Fed does not directly determine the rates charged to consumers by credit card companies or the rates offered by banks for savings accounts and CD deposits. Rather, the Fed is responsible for the federal funds rate, which is the rate banks charge themselves when borrowing short-term.
But when the fed funds rate rises, consumer interest rates tend to follow. This is a good thing in the context of banking products, but not so much for loans and credit cards.
Meanwhile, over the past few months, many people have seen the interest rate on their savings accounts increase. Similarly, banks offered more generous CD rates this summer compared to the start of the year.
Given that the Fed is not done raising interest rates, it is fair to assume that borrowing could become more costly for consumers in the coming months, and well into 2023. But it is also just to assume that savings accounts will start paying more as well.
Now it’s hard to predict how much more they will start paying. Many high-yield savings accounts these days offer annual interest rates of 2%. That’s a marked improvement from earlier in the year, when many savers weren’t even getting 1% on their money.
Precisely where savings account rates could land in 2023 is hard to pin down. But it’s not unreasonable to think they could be closer to 2.5% or 3%.
And remember, CDs tend to pay higher interest rates than savings accounts. So even if savings account rates don’t go up much from where they are today, there may be opportunities to earn more interest by opening a CD.
Should you put more money in savings in anticipation of higher interest rates?
If you don’t have a full emergency fund, it’s certainly worth working to increase your savings. But if you’re ready for that, you might want to consider putting some extra money into a brokerage account.
While savings accounts could pay off handsomely in 2023, you could earn much higher returns on your money by investing in a brokerage account. So if you’re talking about money you don’t think you’ll need anytime soon, keeping that money in a savings account could actually mean settling for less than you might get.
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