Savings Rates Increase this Week

Savings account rates, money market account rates and CD rates continue to move higher. As of this week, the best savings rate on the rate list is at 1.29 percent with a yield of 1.30 percent, up from the prior week's top rate of 1.25 percent.

The uptrend for interest rates will continue throughout 2017 because the Federal Reserve is expected to move rates higher. The Fed met last week to decide interest rate policy and didn't increase the federal funds rate. While the Fed didn't increase the rate last time they are widely expected to increase the federal funds rate next month when they meet again.

The CME Group's FedWatch Tool puts the probability of a June rate hike at 83.1 percent (as of 5/8/17). The Fed is expected to increase the rate from a targeted range of 0.75 - 1.00 percent to 1.00 - 1.25 percent.

The Fed has increased the rate only three times during the past 18 months, twice during the past 6 months and once back in December 2015. Prior to those increases you have to go back to 2006 for the last time the Fed increased the rate. You can view a list of historical fed funds rate changes.

We have dealt with low interest rates since the Great Recession. The Fed funds rate was at a an extremely low range of 0.00 percent to 0.25 percent from December 2008 until December 2015. This decimated deposit rates, during that time savings rates tanked.

Large Banks Don't Want Deposits

Many large banks still didn't want your deposits and set their savings rates very low. Chase Bank, Citibank and Wells Fargo are all offering savings rates at a measly 0.01 percent. The FDIC's Weekly Average Savings Rate for May 1st isn't much higher still at 0.06 percent.

Online banks are a little more generous with their rates and have increased their rates over the past year. We have seen the top savings rates move from under 1.00 percent to 1.30 percent. We might actually see the top rates head towards 1.50 percent after the next fed rate increase.

More Rate Increases in 2017

The Fed has telegraphed two more rate increases this year, if the Fed does follow through with those increases the top savings rates will move towards 1.75 percent. Looking beyond 2017 and Fed is expected to increase rates in 2018 and beyond.

Whether or not that happens remains to be seen thought the prospect of that happening is good. April's employment report released last Friday showed an employment rate of 4.4 percent,  a level that is considered full employment. Wage growth over the past 12 months is at 2.5 percent, still sluggish but should pickup now that we are at full employment.

When wage growth picks up, inflation will also pick up and prompt the Fed to increase rates which will in turn increase deposit rates. A nice change of pace for depositors who have been dealing with low rates for far too long.

Author: Brian McKay
June 2nd, 2017