As online banks raise their interest rates, how far will they go?

Although mortgage and credit card APRs are rising with no end in sight, the silver lining of rapidly rising interest rates is that savers are finally able to earn better returns on CDs, accounts and money market funds, and even on plain vanilla. savings accounts.

Granted, it’s not exactly good news when prices for everything from housing to haircuts seem to be spiraling out of control. But after years of practically getting what you pay for, it’s at least a small consolation prize as banks take advantage of this opportunity to grab market share.

How high could interest rates rise?

As a general rule, look for Federal Reserve rate increases to be best reflected in money market rates, says Jay Hatfield, chief investment officer at Infrastructure Capital Management.

If the federal funds rate (the benchmark rate from which nearly all other interest rates are derived) caps at around 4%, which policymakers projection indicate is the most likely case, suggesting that money market rates will move closer to that threshold, he says.

“If you shop around, you can usually get something close to the bottom of the target for the federal funds rate,” he says. Currently, the target range is 1.5% to 1.75%.

While the Federal Reserve’s rate-setting decisions are still the cause of great speculation on Wall Street, it’s widely believed that rates will continue to rise – perhaps more than bank customers have seen. since a while.

According to FedWatch CME Tool, which tracks market expectations for the move in the fed funds rate, there is a roughly 23% chance that it will end the year at 3.75% or higher. There is a good chance that there will be another rate hike after the Federal Open Markets Committee meeting ends on Wednesday.

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What does this mean for savings accounts and CDs?

Hatfield says CD rates, especially longer-term ones, aren’t likely to move as quickly or as far as money market rates, but savers should see yields continue their upward trajectory.

“Short-term CDs would correspond to money market funds,” he says. “Let’s say six months to a year and a half would be pretty close to the fed funds rate, but the longer you’re out, the rates won’t go up as much.”

As for regular savings accounts, Hatfield says, “it’s going to vary a lot from institution to institution, but they should follow money market accounts — but lower, because they have lower minimums.”

The caveat, says Hatfield, is that you’ll almost certainly have to do some legwork online to get the best rates, regardless of how you want to hold your deposits. “A lot of the big national banks have excess deposits,” he says, which means they’re less inclined to pay competitive returns even when rates rise.

You’ll likely have better luck in smaller institutions: regional banks, community banks, and credit unions are all more reliant on customer money than their bigger siblings.

Online banks and bank-like fintech startups also tend to offer higher rates of return, although some may have limits on how much you can deposit at the highest rate or could blow you through hoops to win it, so take a minute to skim through the fine print before signing up for an account. And always, especially in the case of start-up “neobanks”, verify that your money is held at an FDIC member institution, which will protect you if the site or app folds.

For savers, the best news in this silver lining is that rates shouldn’t crash like they did two years ago. “If we have a recession, short rates would go down, but it’s extremely unlikely that they’ll go down to pandemic levels,” Hatfield said.

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