What will happen to interest rates on your savings this year as the Fed fights inflation?

David Lightman
·3 min read
17

Interest rates on your savings—which now are as high as 5% to 6% on many certificates of deposit at California institutions—are starting to go down.

And they could drop even more in the months ahead.

Even though the Federal Reserve this week decided to hold its key rates steady, financial institutions are concerned that the Fed will drop rates later this year.

For that and other reasons, consumer interest is already down.

“Certificate of deposit rates were the first to fall earlier this year. A few online banks have now started to lower their online savings account rates,” said Ken Tumin, founder of DepositAccounts.com, which tracks rates.

Though the Fed’s reaction to ongoing inflation is keeping savings rates fairly steady, the Fed is still expected to drop its target rate later this year.

“Due to this expectation, banks have been making slight cuts to their deposit rates since the start of the year. Thus, we are likely past the peak of deposit rates, and a slow deposit rate decline is likely as we get closer to the first Fed rate cut,” Tumin said.

Some of Tumin’s findings:

▪ Online savings accounts. The average yield as of April 1 was 4.43%. Peak came in January at 4.49% and has been dropping since. The highest yield offered by any bank is 5.55%.

▪ One year online certificates of deposit.The average yield as of April 1 was 4.94%, down from 5.35% in January. Highest rate of any bank is 5.4%.”

▪ Five year online CD. Average yield as of April 1 was 3.83%: That’s down from January’s 3.95% and 4.04% in January 2023.

▪ Banks and credit unions. “Brick-and-mortar” institutions tend to offer lower rates. Their rates have generally gone up recently, though they remain low. Average savings account yield as of April 24 was 0.52%, up from .50% earlier this year.

California rates

Among the highest rates DepositAccounts found specifically in the state were the 6% annual percentage yield on a seven month certificate—or 6% on an eight month CD for new members—at Financial Partners Credit Union. Maximum deposit is $5,000.

The Los Angeles-based Bank of Hope is offering a 5.25% APY as a six month promotion, minimum $10,000 deposit, while California Bank & Trust offers 5% on a six month CD.

A 5% APY is also available at several institutions, including Poppy Bank (on six, nine and 12 month CDs), Logix Federal Credit Union (flexible 12 month CD) and Technical Credit Union (5, 10, 15 and 17 month CDs.)

The Fed signaled at its meetings Tuesday and Wednesday that it remains concerned about price increases. Its target inflation rate is 2% annually, and its chief measure of price changes, personal consumption expenditures, was up xx% in the 12 months ending in March.

The Fed’s target rates are intended to cool price increases, and some economists wonder whether higher rates of inflation could actually mean higher interest rates.

“If inflation is getting worse, the Fed will raise rates again, or if a recession is on the horizon, the Fed will cut interest rates accordingly,” said Tenpao Lee, professor emeritus at Niagara University in New York.

Jacob Channel, senior economist at LendingTree, which tracks interest rates, was also not optimistic about any Fed rate cut.

“Until inflation growth shows sustained declines, we shouldn’t expect the Fed to slash rates. With that in mind, we may not see any cuts until September, if we see any at all this year,” he said.