The Fed’s latest interest-rate increase, continuing a rate-hike pattern started in December 2015, is nudging rates higher for savings accounts, money-market accounts, and certificates of deposit. Rates paid on savings vehicles have been at record lows since late 2008 when the central bank implemented a “zero-rate policy” in response to the unfolding financial crisis.

Eighteen months ago, when the Federal Reserve began to reverse that policy, banks were quick to pass on rate hikes to borrowers. According to Fortune magazine, Wells Fargo took only 12 minutes to raise borrowing rates after the Fed’s 2015 increase. In contrast, higher rates for savers have been much slower in coming. But finally, stepped-up rates on savings instruments are starting to appear, primarily at online banks and credit unions.

  • Bank Savings Accounts
    Though the average annual percentage yield (APY) for regular-savings accounts remains at an almost-invisible 0.06% (i.e., 6/100s of a percent), online banks are offering regular-savings yields as high as 1.40%, according to DepositAccounts.com, a site that compares bank accounts. An APY of 1.40% may not sound like much in absolute terms, but do the math. A $10,000 deposit in an account earning the average 0.06% would grow to only $10,006 in one year. At 1.40%, the amount would grow to $10,140 — a difference of $134.
     
  • Money-market Accounts
    Interest rates for these accounts — which typically require higher minimums than regular-savings accounts — are rising too, and are starting to outpace rate increases on regular savings.

    Bankrate.com analyst Greg McBride predicts that as the Fed continues its push toward higher rates — and no one knows how quickly (or slowly) the higher-rate policy will continue to be rolled out — savers will benefit from “a continual game of one-upmanship,” as online banks raise their savings rates to gain new customers.

    Unfortunately, any such increases at traditional brick-and-mortar banks probably are still a long way off. Bank profits haven’t exactly been robust in recent years, even as the Federal Reserve’s “quantitative easing” policy (implemented during the Great Recession) led to a boost in bank reserves. Taken together, shallow profits and deep reserves mean traditional banking institutions have little incentive to offer higher rates to attract savers. Instead, such banks are focused on boosting profitability by widening the spread between lending rates and interest paid on savings.

    Will savers put up with that? The Wall Street Journal reports traditional banks are confident that only a small percentage of their customers will jump ship to Internet-based banks to get more interest on regular savings and money-market accounts.
     
  • Certificates of Deposit
    As for CDs, rates on short-term certificates (6-18 months) have started to move up slightly — again primarily at online banks and credit unions. Yields in the 1.25-to-1.75% range are easy to find. Even higher rates are available, but typically with multiple restrictions.

    For example, Christian Community Credit Union has an 18-month “new member” certificate yielding an impressive 4% APY. The maximum deposit is $2,500, and other conditions apply as well — including an automatic rollover at the end of the 18 months into a lower-yielding certificate.

    While rates for 6-18 month CDs are moving upward, longer-term CD rates (2-5 years) remain at a standstill — even at most online banks. “With low inflation and doubts about the strength of the economy, banks won’t be in a rush to raise their long-term CD rates,” notes Ken Tumin of DepositAccounts.com.

    As of mid-July, the average annual percentage yield for five-year CDs stood at an anemic 0.84%, according to the FDIC. But diligent shoppers can find five-year online rates as high as 2.5% (early withdrawal penalties and other restrictions may apply).

Rise to the occasion

It’s been many years since interest rates have moved in a positive direction for savers. Although rates still aren’t moving much, at long last savers are seeing opportunities to squeeze a few more dollars out of the money they’re setting aside. Even so, an opportunity isn’t useful unless it is seized.

As Bankrate.com’s Greg McBride puts it, “Don’t wait six months for your [local] bank to raise their rate from 0.10% to 0.15% when you could be earning 1.3% [or more] now.”


(Click to enlarge)