Will interest rates increase for CDs, high yield savings accounts?

Shaky economic conditions, such as stubbornly high inflation, stock market volatility, and some bank troubles have left many individuals unsure of what to do with their money. Meanwhile, higher interest rates have made home buying and refinancing more expensive.

However, these conditions have also given way to better rates in relatively simple financial products, viz High Yield Savings Account And Certificate of Deposit (CD).

For example, the average rate on 12-month CDs rose from 0.14% in March 2022 to 1.49% in March 2023, Based on FDIC data, according to the St. Louis Fed. And many financial institutions offer many high rateeg around 4.5% to 5% for a 12 month CD.

But will interest rates on CDs and high-yield savings accounts continue to rise? Or will they soon change course? That is what we will discuss in this article.

If you think you could benefit from opening a high-yield savings account in today’s economic climate, start researching your options now to see how much more you can earn.

Will interest rates increase for CDs, high yield savings accounts?

“We probably won’t see a steady increase like the last 6-12 months, but we’re not likely to see a decrease either. In the short term, rates will stay flat or increase slightly. Rates,” said Devin Carroll, owner and principal advisor at Carroll Advisory Group.

However, predictions can be difficult and can vary based on broader economic conditions.

“The path will depend on whether we make progress on inflation, whether there is any contagion stemming from the recent banking collapse, and whether we avoid a recession. All of these are moving targets with high levels of uncertainty,” said Steve Sosnick, chief strategist at Interactive Brokers.

Looking at long-term rates

Trying to predict further rates in the future can also be extremely difficult, but the Federal Reserve’s target moves around the federal funds rate, which is CD and High yield savings account ratesCan give insight.

From March 2022, the Fed has raised rates from near zero to a range of 4.75-5%. And Fed project That rate will rise slightly in 2023 before declining in 2024 and beyond.

“Over the next one to five years, I expect CD and high-yield account rates to decline as inflation comes under control and the Fed ratchets rates back to more normal levels,” says Tara Falcone, CFA, CFP, founder and CEO of Reason.

Defining normal levels can be somewhat subjective. But as Falcone points out, the Fed raised rates as high as 19% in the early 1980s to nearly zero for several years after the Great Depression, compared to rates around 3% in a more normal economic environment, he says.

That doesn’t mean banks will set savings account and CD rates in lockstep with the Fed, but the trends are generally correlated.

However, conditions may change. The recent collapse of Silicon Valley Bank And some concerns from other banks could eventually lead to lower inflation. Yet it could raise rates on CDs and high-yield savings accounts in the near term, as banks try to attract deposits.

“The current crisis of confidence around the safety of large bank deposits is creating a highly competitive rate environment for consumer deposits. While rates may remain high for some time, it is likely that this increased competition will begin to slow as the crisis fades, resulting in lower rates over time. ,” said David Boniface, an LPL-affiliated financial advisor and president of Legacy Capital Wealth.

In this current environment, Those interested in the CD may want to act now To lock in a competitive rate. You can now easily explore your CD interest options online

Use your money

Despite all the uncertainty, many individuals could benefit from putting their money to work now rather than sitting on the sidelines to see what happens.

“The reality is that a 0.25% or 0.5% rate hike from here isn’t going to make that much of a difference to the average person’s savings balance. If you’re worried about missing out on potential upside, you can buy a CD today with, say, half of your passive cash, and then buy a CD in the future. Buy another CD with the balance in three to six months, which can be more or less,” says Falcone.

For those with existing CDs or high-yield savings accounts, it’s not too late to take advantage of higher rates by opening additional accounts. At the same time, consumers can hedge their bets against future rate changes, such as by holding CDs of varying maturities, also known as laddering.

For example, Boniface suggests “putting your short-term needs and emergency funds into an FDIC-insured high-yield savings account and buying 3-, 6-, 9- and 12-month FDIC-insured bank CDs. CDs come with shorter maturities. , adds longer duration to income. This allows for adequate liquidity and provides some duration protection if rates fall, as many speculate.”

Some investors may decide to lock in the rate for a multi-year CD.

“It’s not intuitive to lock in a 5-year CD that yields less than a 1-year CD, but in one year it can be a wise decision. [if] 1-year CD yields have fallen significantly,” Carroll said.

Another way to think about laddering is to match the duration to your income needs.

“In other words, if someone needs money this month to pay rent or a mortgage, it doesn’t make much sense to lock it away for a few months or more. Conversely, if you expect tuition payments in a few months and have cash now, “It can make sense to invest in a CD that matures shortly before the payout,” says Sosnick

That, CD and High Yield Savings Account Not the only option to consider. Other relatively low-risk investments, such as Treasuries, may also be attractive. Shopping around for different rates and potentially talking to a financial advisor can help you find a good risk/reward balance as the interest rate environment changes. Research your high-yield savings account options today to see how much more you can earn