The Federal Reserve increased interest rates again. What it means for Californians’ savings
Consumers have watched their savings accounts grow, thanks to the Federal Reserve’s recent parade of rate increases. Another boost may be on the way,
The Fed raised its key rate another one-fourth of 1% Wednesday, its 10th hike in the last 14 months. Those increases have meant higher interest rates paid to consumer savings accounts.
In California, several banks and credit unions have been offering promotional savings and money market accounts in the 3% to 4% range and short-term promotional certificates of deposits with rates close to 5%. A year ago, those accounts paid interest of less than 1%.
“More of these promotions should be expected after another Fed rate hike,” said Ken Tumin, founder and editor at DepositAccounts.com, which tracks savings rates..
There’s a flip side to all this, of course. Loan rates, particularly on credit card debt, are also likely to rise again.
The Fed’s action “means that the vast majority of credit cardholders” should see the card’s interest rate go up one-fourth of 1% within a billing cycle or two, said Matt Schulz, chief credit analyst at LendingTree, which follows credit trends.
He noted that the increase applies not only to future purchases, but debt currently held.
“That makes it a really big deal,” Schulz said.
The Fed’s rate increases are aimed at slowing inflation by lowering demand for goods and services. Lower demand, in theory, means less incentive for sellers to raise prices.
The annual cost of living increase hit a 40-year high nationally of 9.1% last summer, but has since slowed. Consumer prices in California were up an estimated 7.3% last year but are expected to rise 3.8% this year, according to the March UCLA Anderson School forecast.
Higher rates for savers
A year ago, the average online yield, or effective interest rate, on savings was 0.50%. Today, it’s 3.76%. If you have $10,000 in your account, that higher yield results in an additional $326 in annual interest earnings.
The average online one-year certificate of deposit yield has gone up 3.98 percentage points in the last year. If you have a $10,000 balance, that means an extra $398 in annual interest earnings.
The average online 5-year CD yield is currently 3.95%. While that’s up from a year ago, it’s slightly down from January.
A $10,000 balance would now get 2.72 percentage points more – or $272 in annual interest – than last year at this time.
Traditional brick and mortar banks continue to pay less. The average savings account yield so far this year is averaging 0.38%, up from 0.12% a year ago. That meant an additional $26 for a $10,000 balance.
The future is expected to involve a period of stabilizing rates followed by a period of rate declines, said Tumin.
He saw three trends unfolding. One-year accounts should continue to see rate gains, though they’re likely to slow. Rates on five-year accounts could continue to fall if Wednesday’s Fed hike is the last for awhile. Economists expect the Fed may pause its rate hike cycle.
And while the collapse of three major banks this year has motivated other banks to pay higher rates, in the hope of attracting more cash, “those rate hikes were mostly temporary,” Tumin said.
Higher rates for loans
Interest rates on loans appear headed higher, notably on credit card balances.
Mortgage rates have gone up and down this year, dropping as low as 6.09% in February and as high as 6.73% the next month. “Because of this volatility, it’s difficult to say what exactly mortgage rates will do over the coming months,” said Jacob Channel, LendingTree chief economist..
California credit cardholders could see higher rates almost immediately, though.
At the end of 2022, the average credit card debt in California was $7,756. According to the latest data from the Fed, the national average interest rate on a card accruing interest – meaning one that carries a balance month to month – is 20.92%.
