Why are interest rates on high-yield cash accounts going up?

Why are interest rates on high-yield cash accounts going up?

11.03.2023

Up, up, up.

It seems that the cost of everything lately is on the rise. Rising costs and high inflation can take a bite out of your budget, but there is something to celebrate: High-yield cash account interest rates are also on the rise. In fact, rates are higher than anything we’ve seen in years.

With interest rates topping 4%, you might find yourself wondering why these rates keep increasing. Let’s take a quick dive into the reasons for these rate increases and find out how you can make sure you’re taking advantage of them.

Fluctuating interest rates

Some savings vehicles like certificates of deposit (CDs) lock in a rate for a set period of time. On the other hand, cash account interest rates will go up and down over time. This is especially true of high-yield cash accounts.

High-yield cash accounts are bank accounts that pay customers above-average interest rates.

While rates for these accounts tend to be better than average, they do vary over time. Everything from the type of bank and new competitors to global economics and federal policies can trigger these gyrations.

A few short years ago, high-yield cash accounts paid about 1% or less.1 Now, though, those rates are much higher.

The Fed does it again

Starting in 2022, you likely noticed an increasing creep of your high-yield cash account interest rates. Now, some banks are regularly offering 4% or more for your money. The cause of this steady uptick we’re all enjoying? The Federal Reserve – otherwise known as The Fed – manages monetary policies in our country and regulates our financial system.2 So when things start to go haywire, they jump into action.

Take last year for example when inflation hit 9% in June 2022.3 Once inflation started to soar, the Federal Reserve swooped in. They responded to this sky-high inflation rate by raising short-term interest rates.

These rate hikes attempt to slow the circulation of money, temporarily decreasing supply and demand. When mortgage and credit card rates go up, customers get more cautious with their spending.

This consumer caution means that there is less consumer demand for things – we simply don’t buy as much as we normally would. As a result, the prices for goods and services will start to drop. When prices start to trend downward, inflation is no longer red hot.

With inflation rates rising high over the past year, the Fed implemented numerous rate hikes to pump the brakes on inflation.

When banks respond to rate hikes

Banks offering high-yield cash accounts know that these higher interest rates convince customers to open accounts with them. When one bank starts to increase their rates, others tend to follow suit. These savings account interest rate increases draw more customers, which is good business for banks.

Savings accounts build a strong financial foundation for banks. They can use this money to lend including to other customers for car loans, mortgages, and other lines of credit. Generally, these borrowers pay higher interest rates on the amounts borrowed then the bank is paying in interest on savings accounts, which keeps banks financially solvent; the financial security of the bank is then passed back to customers. When banks are able to continue to pay good interest rates, they retain their current customers and attract others.

With inflation sticking around and the Fed continuing to consider future rate hikes, it’s reasonable to guess that banks will continue to maintain higher interest rates. Of course, we don’t know how long it will last. But you may want to take advantage of it while you can.

How to maximize Your money

As you hear talk of interest rates rising, it’s important to remember that you don’t benefit from this automatically. You need to make sure that you are maximizing your money.

Step 1: Check your interest rate.

Just because rates in general are increasing, doesn’t mean all of them are. If your money isn’t earning a competitive rate, consider a high-yield cash account.

Step 2: Verify that your deposits are FDIC insured.

The Federal Deposit Insurance Corporation is a government organization that provides insurance to customers. This insurance covers the amount of your deposit – up to $250,000 – in the event of a bank collapse. While this hopefully isn’t something you’ll need to worry about, history teaches us that this insurance is something we want to have.

Step 3: Be mindful of fees.

Now that you know the interest rate on your account, look into other numbers associated with it. Does your bank charge fees? Monthly maintenance fees and inactivity fees can eat away at your money’s growth.

Step 4: Take a look at the other fine print.

You also want to look into account minimums and other activity requirements. Some accounts don’t have any of these parameters. Others, though, require a certain number of direct deposits or other transactions to stay in good standing. By understanding all the details associated with your account, you can keep more money growing in your account.

Final thoughts on increased interest rates

Rising interest rates aren’t something you’re automatically benefiting from. Instead, if you want to claim the potential benefits, you have to make sure that your money is deposited into a high-yield cash account or a similar savings vehicle.

 

 

1 Forbes, “History of Savings Account Interest Rates,” January 2023.

2 Federal Reserve, “Board of Governors of the Federal Reserve System,” October 2023.

3 U.S. Bureau of Labor Statistics, “Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years,” July 2022.

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The Currency editors

Staff contributors

The CurrencyTM, a publication from Empower, covers the latest financial news and views shaping how we live, work, and play. We keep you current on ways to plan, save, and invest for life.

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