Interest rates on savings accounts have risen to levels not seen since 2015, according to data released this week by the FDIC. The average savings account annual percentage yield (APY) now stands at 2.15%, the highest since Q1 2015. This rapid increase comes on the heels of multiple Federal Reserve rate hikes aimed at curbing inflation.
Fed Rate Hikes Push Up Deposit Rates
The Fed raised its benchmark rate seven times in 2022 and 2023, bringing it from near zero up to 4.5%. These hikes have pushed up the rates banks can earn on loans and other investments, allowing them to also lift the deposit rates they offer customers.
As the below table shows, top-yielding savings accounts are now paying over 6% APY – returns not seen since before the Great Recession:
| Bank | Savings APY |
|---|---|
| Quontic Bank | 6.17% |
| BrioDirect | 6.10% |
| CFG Bank | 6.00% |
| CIT Bank | 5.90% |
Rates on certificates of deposit (CDs) have also increased, though not as dramatically as savings accounts. The average 1-year CD rate now stands at 3.50%, up from 0.14% in January 2021.
Savers See Healthy Returns After Long Drought
For Americans saving for retirement and other goals, these higher deposit rates provide a boost after more than a decade of paltry returns. Savings interest rates plummeted after the Great Recession, with the average savings yield falling below 0.10% by 2015.
This long period of rock-bottom rates prompted many savers to move cash into riskier investments like stocks, real estate, and crypto trying to earn better returns. But with savings rates now over 6X higher – and FDIC insurance protecting deposits – savings accounts may be a smarter short-term parking place for cash again.
What’s Driving Rapid Savings Rate Hikes?
Along with the Fed hikes, savings yields are getting a boost from banks competing aggressively for deposits to fund all the consumer and business lending underway.
Loan demand has jumped as pandemic impacts fade, the housing market stays hot, and business investment revs up. But at the same time deposits have stagnated, as many Americans have drawn down savings stockpiles built up earlier in the pandemic.
This combination of robust loan growth and sluggish deposit growth has put pressure on bank funding costs. Offering higher deposit rates is one way banks aim to attract more deposits to power further lending.
As money market analyst David Smith notes:
“Banks need deposits to write loans, plain and simple. With lending volumes spiking, the battle for deposits is intense right now. The winners are consumers now earning far higher yields on savings accounts, CDs, and money markets than they were just a year ago”
What Comes Next? More Upside for Savers
Most experts believe savings rates have further room to rise in 2024. The Fed is still actively hiking rates and has signaled it may push the fed funds rate above 5% this spring. As this monetary tightening continues, banks will likely have the flexibility to lift deposit yields further.
Another factor that could keep savings yields climbing is high inflation persisting. The latest data still shows consumer prices rising over 7% annually – well above the Fed’s 2% target. As long as this inflation stays elevated, the Fed will keep rates higher, and savings yields should follow.
So savers can likely expect to earn the best risk-free returns on cash in years ahead. Though if factors change and inflation cools faster than expected, deposit rates could moderate again down the road.
Smart Steps Savers Can Take Now
For those looking to take advantage of today’s unusually rewarding deposit rates, here are some moves worth considering:
- Open an online savings account – Top yields are now found at online banks and credit unions. Opening an account is quick and easy.
- Shop around – Rates vary widely across banks, so shopping around is key to scoring the best yields.
- Consider a CD – Locking up funds for 1-5 years in a CD can secure even higher returns over savings accounts.
- Ladder CDs – Opening multiple CDs with different maturity dates spreads risk vs. locking up all funds at once.
- Review investments – With savings yields up significantly, holding too much cash in brokerage accounts earning little may no longer make sense.
The nearly 10-year highs for risk-free savings interest provide investors and savers a great opportunity for low-risk returns. Following the above tips can help consumers make the most of this unusually rewarding rate environment.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
