Will I Ever See an Increase In My Savings Account Rate?
August 3,2022. By J.D. Wolfsberg:
Money market yields have inched up given the recent interest rate hikes by the Federal Reserve Bank. Using a hypothetical example and current average numbers, the yield on a typical institutional money market fund is now around 1.5%, and this will continue to track the Fed Funds rate relatively closely which now sits between 2.25% – 2.50% after their last meeting. Money markets funds may not reflect this increase immediately. Lags can occur as the weighted average maturity of these funds vary, taking between two and four weeks to reflect the rising rates. Despite the lags, the increase is being welcomed by fixed income portfolios with open arms after money market yields have been zero since the stimulus blast during the pandemic. This increase does bring rise to an important question:
‘Does this mean that my bank will now start paying higher rates on savings accounts?’
The short answer is yes, but with some patience. On average, savings rates offered at the bank level are going to significantly lag the increases indicated by the Federal Reserve, and at a greater length than the institutional money market funds you may hold in your investment portfolios. It is true that every rate hiking cycle is different, and there certainly has been variability in when deposit rates increase after the Fed has hiked. That said, the largest banks are still flush with liquidity, meaning it is unlikely that the largest banks will need to hike their deposit rates immediately to attract additional funds. As of July 27th, the national average savings rate was still only 0.11%. There are exceptions, with online banks and smaller local banks tracking the Fed Funds more closely to attract deposits.
We will also begin to observe CD rates tracking the Fed moves more closely, but with ownership of these vehicles comes the caveat of needing to hold the CD to maturity to yield the maximum return. Given that the Fed is still actively engaged in combatting inflation, having the ability to be a bit more nimble may be important in the coming months. Incorporating CDs into your portfolio should be a decision discussed with your financial advisor.
With news and reports coming out daily, this is simply a report of our observations and preliminary research. We will continue to keep our finger on the pulse of savings rates as they impact our clients financial plans and portfolios. If you have any questions regarding your investment strategy or how the rising interest rate environment impacts your financial plan, please reach out. We are here.