Savings Rates Forecast 2023

The Federal Reserve has implemented aggressive tactics to combat rising inflation and stabilize the economy this year. Namely, it has raised rates to increase borrowing costs and slow consumption. Since March 2022, the effective federal funds rate has risen more than 3.5%—the steepest leap in recent history.

You might wonder what savings rates will look like in 2023. Let’s take a closer look. Account details and annual percentage yields (APYs) are accurate as of June 2, 2023. Account availability and APYs may vary based on location.

When Will Savings Interest Rates Go Up?

If you’re wondering when savings rates will go up, you’ll be pleased to know they’ve been rapidly climbing since last year. Here’s an overview of the national savings interest rates starting in April of 2022:

• April 2022: 0.06%
• May 2022: 0.07%
• June 2022: 0.08%
• July 2022: 0.10%
• August 2022: 0.13%
• September 2022: 0.17%
• October 2022: 0.21%
• November 2022: 0.24%
• December 2022: 0.30%
• January 2023: 0.33%
• February 2023: 0.35%
• March 2023: 0.37%
• April 2023: 0.39%
• May 2023: 0.40%

Over the course of one year, the national savings interest rate has increased sixfold. And this trend may continue as the Fed makes further attempts to get inflation under control. But before we make predictions about how high savings interest rates could go in 2023, let’s review some savings rate fundamentals.

The Federal Funds Rate

The federal funds rate is the interest rate at which depository institutions—such as banks and credit unions—lend reserve balances to other depository institutions overnight. It’s one of the most important financial policies set by the Federal Open Market Committee (FOMC) and serves as a benchmark for interest rates across the economy.

Changes to the federal funds rate can have a far-reaching impact on consumer borrowing costs. As the Fed increases the federal funds rate, interest rates on credit cards, mortgages and auto loans typically rise accordingly. This higher cost of borrowing decreases the overall demand for goods and services and, in turn, slows the inflationary pressure on prices.

Though this year’s skyrocketing interest rates might be a difficult pill to swallow for consumers seeking home improvement loans or auto loans, there is a silver lining. With rising federal funds rates comes an increase in savings interest rates.

This forecast gives us a great deal of insight into what savings interest rates may look like as the year proceeds.

Savings National Rate Cap

Before predicting the savings rates in 2023, we have to consider another crucial data point: The savings national rate cap.

On Dec. 15, 2020, the FDIC’s Board of Directors imposed the savings national rate cap to limit less-than-well-capitalized institutions from offering rates far exceeding the national rate. With this restriction in place, riskier institutions can’t offer sky-high savings interest rates to attract new customers.

Keep in mind that though this rate cap only applies to institutions the FDIC deems “less-than-well-capitalized,” it still helps control the overall rise in interest rates on U.S. savings accounts since these institutions can’t bid up the rates.

For nonmaturity deposits, such as savings accounts, the national rate cap is calculated as the national rate plus 75 basis points or the federal funds rate plus 75 basis points—whichever is higher.

As of May 2023, the savings national rate cap was 5.58%, whereas the average rate on savings accounts was only 0.40%. However, unlike traditional financial institutions, online banks such as Ally Bank typically offer high-yield savings accounts with rates closer to the national rate cap.

Why Are Savings Rates Down?

While savings rates climbed steadily throughout most of 2022 after plummeting during the pandemic, they are still much lower than 40 years ago.

The last time the U.S. faced inflation as high as it is now was in the early 1980s. During that time, the Fed jacked the interest rates to above 19% to restore price stability. But the Fed’s efforts to throttle inflation tipped the economy into a recession.

Today’s savings rates are down compared to four decades ago because as the economy began improving in the mid-1980s, the federal funds rate stabilized and hasn’t risen above 10% again.

Will savings rates go back up to historic highs? The chances are low. Having seen how the restrictive monetary policy in the early 1980s hurled the nation into a severe recession, it’s unlikely that the Fed will pursue such a course again and risk destabilizing the economy.

How High Will Savings Rates Go?

How high savings rates will go next year depends on whether inflation continues to rise and how aggressively the Fed acts in response.

Since the start of 2022, the Fed has hiked rates 10 times to combat rising inflation. As of May 2023, the federal funds rate ranges from 5.00% to 5.25%.

If this prediction is correct, it won’t be surprising to see some of the best high-yield savings accounts offering rates exceeding 4%.

Savings Rates Forecasts 2022-23

According to Forbes Advisor’s list of the best online savings accounts, the average APY of the top four highest-yielding savings accounts in December 2022 was 3.28%—86% of the most recent national rate cap. If this ratio holds and the federal funds rate averages between 3.90% to 4.90% in 2023, we can expect the best savings rates to reach 5.00% APY or more.

How To Get the Best Savings Rate

If you’re seeking maximum savings rates, you might want to look into high-yield savings accounts offered by fintech companies and digital banks.

Online banks don’t have the substantial overhead costs of traditional brick-and-mortar banks, so they can generally offer more competitive interest rates. Additionally, smaller online banking institutions may be more likely to offer enticing interest rates to attract customers as they don’t have marketing budgets as large as those at bigger banks.

If you’re interested in online banks, an option worth considering is Bread Savings. Bread Savings High-Yield Savings Account is an online-only bank that offers high-yield savings accounts that earn 4.50% APY—more than 14 times the current national average rate on savings accounts.

Bottom Line

Based on figures provided by the Federal Reserve, it’s probable that high-yield savings accounts could offer 5.00% APY or more in 2023. So, if you have a huge chunk of change sitting idle in your checking account, consider moving it to a high-yield savings account and capitalizing on the current rise in interest rates.