Interest rates for certificates of deposit and high-yield savings accounts jumped from less than 1% up to over 5% annual percentage yield in just a few years. As the Federal Reserve raised the federal funds rate range to combat runaway inflation, banks followed suit, pushing interest rates, including deposit rates, a little higher.
But less aggressive rate hikes and September’s rate hike pause have left us questioning where savings and CD rates will go next. With inflation cooling and banks slowing the pace for raising rates, there’s a chance that savings and CD rates are as high as they’ll go for many banks. But maybe not.
Lawrence Sprung, lead wealth adviser at Mitlin Financial, broke down why rates are so high right now and what he predicts will happen next.
Where CD and savings rates currently stand
This week, CD rates continued to go up for some of the banks we track at CNET. The increases come after rates remained stagnant last week. However, a handful of banks lowered rates slightly for select terms. But rates are still between 4% and 5.50% APY, depending on the bank and term.
As for high-yield savings account rates, you can still find APYs averaging 4.80% based on banks we track weekly. Some banks, like Newtek Bank and UFB Direct, have rates as high as 5.25%.
Seeing rates this high isn’t surprising for Sprung, but not every bank offers high APYs. That’s why it’s best to check your current savings rate to make sure you’re maximizing the interest you’re earning.
“You may be surprised to find out your bank is paying you less than 1% on a savings account,” he said. “With very little work, you could be getting close to 5%.” It’s better to know than not look and not have your money working for you, he added. If your bank isn’t paying competitive rates on your savings, shop around to find a better fit for your money.
What happens to CD and savings rates next will depend on a few factors, including the federal funds rate. Banks also look at the Treasury market, inflation, and the strength of the economy -- which itself has many factors. However, banks usually move in lock-step with the Fed’s decision. For instance, when the Fed hikes rates, most banks usually do, too.
Where will savings and CD rates go next?
Despite the many moving economic factors, you shouldn’t expect a significant change in savings and CD rates for the rest of the year. “If anything, you may see them dip just a bit,” said Sprung. Some banks are already quietly doing that.
But one-off rate increases are still possible if a bank wants to encourage additional deposits.
Today’s high savings and CD rates can be an incentive to keep your money in the bank longer, said Sprung. You may keep more of your emergency fund in a bank’s high-yield savings account if you’re earning enough interest on the savings.
When will rates drop?
According to Sprung, there’s still plenty of time to earn 4% to 5% APY on your savings.
“I do not foresee rates dropping until mid to late 2024 at the earliest,” said Sprung. We would need to see more positive economic signs before this happens, he suggested, such as the Fed lowering rates.
Keep in mind that the federal funds rate isn’t always the best indication of a bank’s CD and savings rates, said Sprung. It usually impacts what the bank will charge for borrowing. When the central bank raises rates, that rate increases how much the bank must pay to lend out money. Therefore loan interest rates are higher. And while banks don’t have to raise rates for saving when the Fed raises the federal funds rate, they usually do to remain competitive.
Where’s the best place to stash your cash?
Since Sprung expects savings and CD rates to remain high until the Fed signals that inflation is lowering, you can still earn the 5% or higher rates on CDs and savings. How you decide to take advantage of the high savings rates depends on your goals.
For instance, you may open a one-year CD to earn 5% on your money, then see where rates stand this time next year since experts don’t believe rates will drop anytime soon. Or you may build a short-term CD ladder to have money available throughout the year.
If you need more flexibility, high-yield savings rates are still high but they’re variable. So there’s a chance that even though rates are high, your APY may shift and your return over time will be more unpredictable.