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Rates on savings accounts and certificates of deposit are seeing highs not seen for at least a decade. But what exactly impacts the rate of your bank account?
Let’s break down a few factors.
Fed rate increases push up savings rates
From March 2022 to May 2023, the Federal Reserve has steadily increased its federal funds rate, or Fed rate, from nearly zero to around 5%. These ongoing rate increases are the Fed’s attempt at curbing high inflation. The rate itself is the one U.S. banks use to borrow or lend money overnight between each other, and a higher rate means higher borrowing costs.
Banks and credit unions, in turn, take their cue from Fed rate increases to raise their rates on certain loans as well as savings accounts and certificates of deposit. Banks often fund new loans and investments using the money in customers’ bank accounts, and higher savings rates help attract more customers.
But banks don’t typically follow the Fed rate immediately, and their rates typically remain far lower. From April 2022 to May 2023, national average rates only rose from 0.06% to 0.40% for savings accounts and 0.13% to 1.59% for one-year CDs, based on a NerdWallet analysis. The biggest banks, in particular, can often lag behind most in raising savings rates.
“Historically, bank deposit rates move with other interest rates, but not very much. A lot of bank deposits are ‘sticky,’” meaning most depositors stay with a bank even if rates don’t keep up with the market, said Philip Dybvig, economist and professor of banking and finance at Washington University in St. Louis, in an email. “As a result, banks have little incentive to increase rates with the market.”
Online banks compete with higher rates
National average rates don’t tell the full story, though. If you’re an avid saver, you’re probably familiar with high-yield savings accounts and high-yield CDs. These accounts often have rates several times the national average and are mostly available at online banks and online credit unions. These branchless institutions don’t have the overhead costs of brick-and-mortar banks, so they can provide — and compete for — customers with higher rates.
In June 2022, high-yield savings rates at some online banks were around 1% to 1.25% annual percentage yield, and competitive one-year CD rates were hovering around 1.50% to 2% APY, based on NerdWallet data. In May 2023, top savings rates are closer to 4.75% APY while some one-year CD rates have surpassed 5% APY.
To take advantage of rates, compare high-yield savings accounts as a potential place for emergency savings or other short-term money goals. Rates are variable so they can change, but adding regular contributions will boost your savings and help you see the effects of compound interest over time. If you have a portion of savings that can stay untouched for months to years, high-yield CDs can offer competitive, fixed rates that also compound interest.
Other factors that affect rates
The type of bank account matters
Banks typically raise rates quickly on CDs followed by savings accounts and money market deposit accounts, Federal Reserve Bank of New York researchers said in an email.
CDs lock up funds for a fixed term, while savings and money market accounts allow for ongoing access, though they can have a monthly limit on certain withdrawals. The type of account with the most access to funds — a checking account — typically earns minimal, if any, interest. The national average for interest checking has barely budged in the past decade, based on NerdWallet analysis.
Consumers may seek higher returns outside banks
Banks have an incentive to keep interest rates on various savings accounts low to save on costs, says Daniel Talley, professor of economics and statistics at Dakota State University. But banks also have to be competitive with other opportunities that savers have.
Talley says money market mutual funds are a good example currently of getting high returns that are relatively safe and accessible as far as investments go, though they’re not federally insured like bank accounts are. Money market funds consist of short-term, high-quality investments such as U.S. Treasurys.
New York Fed researchers also called out money market funds as an example of an attractive nonbank option for depositors. Consumers may opt to take more money out of banks, which puts pressure on banks to raise their rates to keep those consumers.
Economic forecasts can play a role
The only type of bank account with fixed rates is a CD, and typically the longer a CD term, the higher the rate. You ideally get a bigger reward for keeping funds inaccessible for longer. However, CD rates in the first half of 2023 — both national average and high-yield rates — experienced an inverted yield curve, a phenomenon that originated with bonds such as Treasurys, in which long-term interest rates are lower than short-term interest rates. This type of yield curve can reflect banks’ beliefs that interest rates are headed downward, so they’re adjusting CD rates accordingly. Talley says banks might be betting that the Fed will cut rates soon to fight a possible recession.
A rising rate environment tends to be good news for saving money in bank accounts, but remember that other factors can determine the rate you get.