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Understanding the Factors Behind Rising Savings Account and CD Rates

Savings account and certificate of deposit (CD) rates have recently reached levels not seen in over a decade. The driving forces behind these rate increases are a combination of factors influencing the financial landscape. Let’s delve into the key elements that impact the rates on your bank account.

Questions Answered in this Article

  1. Q1: What has caused the recent increase in savings account and CD rates? A1: The recent increase in savings account and CD rates can be attributed to the Federal Reserve’s steady rate hikes, aimed at combating high inflation.
  2. Q2: Why do larger banks often lag behind in raising savings rates? A2: Larger banks tend to lag in raising savings rates because many deposits remain stable even when rates don’t keep pace with the market, giving them little incentive to increase rates.
  3. Q3: What advantage do online banks offer to savers? A3: Online banks often provide high-yield savings accounts and CDs with rates several times higher than the national average due to their reduced overhead costs compared to traditional brick-and-mortar banks.
  4. Q4: Which type of bank account typically earns minimal interest? A4: Checking accounts offer the most access to funds and usually make minimal interest.
  5. Q5: How does the inverted yield curve impact CD rates? A5: The inverted yield curve observed in the first half of 2023 suggests that banks are adjusting CD rates downward in anticipation of declining interest rates, potentially related to the possibility of the Federal Reserve cutting rates to counter a potential recession.

Federal Reserve Rate Impact

From March 2022 to May 2023, the Federal Reserve has steadily increased its federal funds rate, also known as the Fed rate, from almost zero to approximately 5%. This series of rate hikes is the Fed’s response to combatting high inflation. The Fed rate is the benchmark for overnight lending between U.S. banks, affecting borrowing costs. Banks and credit unions, in turn, adjust their rates for various loans, as well as savings accounts and CDs. However, it’s important to note that these banks usually don’t immediately mirror the Fed rate, and their rates remain significantly lower. For instance, from April 2022 to May 2023, national average rates increased modestly for savings accounts and CDs. Larger banks, in particular, may lag in raising savings rates, as many deposits tend to remain stable even when rates don’t keep pace with the market.

Competition from Online Banks

National average rates offer only part of the story. Savvy savers are likely familiar with high-yield savings accounts and CDs. These accounts, typically available at online banks and credit unions, often provide rates several times higher than the national average. Online institutions, operating without the overhead costs of physical branches, can attract customers with these competitive rates. For example, in June 2022, high-yield savings rates at online banks ranged from 1% to 1.25% annual percentage yield (APY), while one-year CD rates hovered around 1.50% to 2% APY. By May 2023, top savings rates have climbed closer to 4.75% APY, with some one-year CD rates surpassing 5% APY. To leverage these rates, individuals can compare high-yield savings accounts for short-term goals or consider high-yield CDs for a portion of their savings that can remain untouched for extended periods, benefiting from competitive fixed rates and compounded interest.

Bank Account Type Matters

The type of bank account plays a significant role in rate adjustments. Banks generally raise rates more quickly on CDs, followed by savings and money market deposit accounts. CDs lock funds for fixed terms, while savings and money market accounts offer ongoing access, albeit with potential monthly withdrawal limits. Checking accounts, which provide the most access to funds, typically earn minimal interest. Interest rates for interest-bearing checking accounts have barely budged in the past decade, according to NerdWallet analysis.

Alternative Opportunities for Savers

Banks aim to keep rates on various savings accounts low to minimize costs. However, they also face competition from other investment options available to savers. Money market mutual funds, for example, offer relatively high returns, although they are not federally insured like bank accounts. These funds consist of short-term, high-quality investments such as U.S. Treasurys. As savers consider alternatives, banks may face pressure to raise their rates to retain customers.

Economic Forecasts Impact Rates

Fixed rates are a feature of CDs, and longer CD terms typically come with higher rates. However, an interesting development occurred in the first half of 2023: both the national average and high-yield CD rates experienced an inverted yield curve, a phenomenon initially associated with bonds like Treasurys, where long-term interest rates are lower than short-term rates. This yield curve can reflect banks’ expectations of declining interest rates, leading them to adjust CD rates accordingly. Some experts suggest that banks might be anticipating a rate cut by the Fed to counter a potential recession.

While a rising rate environment generally benefits saving money in bank accounts, it’s crucial to remember that various factors influence the rate you ultimately receive. Understanding these factors empowers individuals to make informed financial decisions for short-term goals or longer-term strategies.


  • Savings account and CD rates are at decade-high levels.
  • The Federal Reserve’s rate hikes, driven by inflation concerns, have pushed up these rates.
  • Banks and credit unions adjust rates based on the Fed’s rate increases.
  • Online banks offer high-yield accounts due to lower overhead costs.
  • National average rates don’t fully reflect competitive rates at online institutions.
  • Type of account matters; CDs get rate adjustments faster than savings accounts.
  • Interest-checking rates have remained stagnant over the past decade.
  • Savers explore alternatives like money market funds for better returns.
  • Economic forecasts, including an inverted yield curve, impact CD rates.
  • Understanding these factors helps individuals make informed financial decisions.
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