Rate Hikes Will Hit Borrowing Quickly, Boost Savings Slowly. Here’s What to Do.

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William Howard

Senior Vice President
Hilltop Securities Inc.
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Borrowers are likely to see interest rates go up on credit cards, personal loans, home-equity lines of credit, private student loans and other debt later this month if the central bank raises short-term interest rates as expected. But savers shouldn’t expect to see higher interest rates for savings accounts or certificates of deposit right away.


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The federal funds rate, which is the Federal Reserve’s benchmark short-term interest rate, has been in the historically low range of 0% to 0.25% since March 2020, when it was cut amid the initial days of the pandemic. The Fed has signaled that it’s likely to begin tightening monetary policy to curb inflation that has been running near four-decade highs.

“Your variable-rate loans will immediately react to a Federal Reserve increase in interest rates, but on the deposit side, there will be a delay, especially since the financial system is flush with cash,” says Kurt Spieler, chief investment officer for the wealth management division at First National Bank of Omaha. 

Despite these dynamics, financial pros say savers have some options to boost the yields they see on their cash by shopping around. What’s more, pros say it can be a good time to tackle debt before rates rise too far, diversify yields, and pare risk. 

When to Look for Higher Deposit Rates

Spieler says some banks could begin raising rates on deposits sooner than others, for instance, if they have a lot of loans outstanding and want to attract more deposits. “But you’ll have some banks that have so much liquidity that they can’t find enough loans to make, so they’ll react very slowly,” he says.

That said, Spieler adds, banks could begin offering higher interest rates to savers in the third quarter if the Fed acts aggressively and raises rates to 1% by June. 

In theory, rising interest rates should spur banks to increase the rates they pay to savings accounts and CDs in order to stay competitive with other banks, says Joseph Goetz, founding partner at the financial-planning firm Elwood & Goetz. 

However, banks know that most savers won’t move their money, especially if the difference between interest rates is small, he says. “If they raise the rates and their customers weren’t going to leave anyway, and then they don’t bring in that many more customers, then it hurts their bottom line,” Goetz says.

To get the highest available interest rate for a savings account, Goetz says savers should consider online banks, which typically offer higher rates than brick-and-mortar retail banks. 

Bo Savings, for example, offers a savings account with a 0.65% rate, with an initial deposit of at least $250, while Barclays online offers a 0.55% rate with no minimum deposit. Conversely, current interest rates for savings accounts at Bank of America and Chase stand at 0.01%.

Cut Debt and Diversify

Mychal Campos, head of investing at robo-advisory Betterment, says the “quarter or more” it takes for interest rates on savings accounts to begin climbing is all the more reason for consumers to prioritize paying down high-interest debt from credit cards and loans, even if that means saving less. “You really want to try to clear out as much of that higher-interest debt as you can,” he says.

Rising interest rates also present an opportunity for investors nearing retirement to reduce their exposure to market volatility, says First National’s Spieler. With savings accounts and CDs yielding modest returns, many retirement savers have taken on more risk than they otherwise would by focusing heavily on equities, he says.

“We tell our wealth-management clients not to be afraid of higher interest rates,” Spieler says. “If interest rates do go up 1% or 2%, that will allow you as a saver to invest more in CDs and municipal bonds, so you can earn the level of return that you need while taking on less risk.”

Alternatively, savers might consider Treasury’s Series I savings bonds through TreasuryDirect to protect themselves from high inflation, he says. Through April, the initial interest rate on new I-bonds is 7.12%, and they have a minimum ownership term of one year. I-bonds earn interest based on both a fixed rate of return that’s known when you buy the bond and an inflation rate that the Treasury Department adjusts twice a year. 

With I-bonds, interest is earned monthly and compounded semiannually over 30 years, or until the owner cashes them in. If you redeem them within five years, you will lose the last three months of interest. 

“Given this relatively small interest penalty, I-bonds certainly can be used as one component of an emergency fund that would likely yield substantially more than a typical savings account at a brick-and-mortar bank,” Goetz says.  

Write to retirement@barrons.com

William Howard profile photo

William Howard

Senior Vice President
Hilltop Securities Inc.
Schedule a meeting