A silver lining to higher interest rates? We asked the experts for their take.
From an economic perspective, 2023 is off to a rocky start.
Economists are warning of a possible recession. Mass layoffs are already making headlines. Persistent price increases have yet to stop burning a hole in most people’s wallets.
At the center of it all is the Federal Reserve, the country’s central bank, still in the middle of a multi-month crusade to get a grip on inflation. The Fed raised interest rates multiple times in 2022, deploying its main weapon for slowing the pace of rising prices.
For the most part, that’s been bad news for consumers, lifting the cost of borrowing so that mortgages, car loans and even credit card payments will cost you more in interest than they did a year ago.
But there are a few upsides to higher rates — and in an otherwise challenging economic moment, it might be worth trying to make the most of it. Here are a few tips to consider, according to experts that The Charlotte Observer spoke with.
1. A good time for savers
While banks charge more interest on loans when the Fed raises rates, they’ll also increase the interest paid on savings accounts as well.
That’s something that savers can take advantage of in a high rates environment, said Ken Tumin, a senior industry analyst at Charlotte-based LendingTree.
“For those with money in the bank and their savings accounts, now you can get much higher interest rates than you could in the last ten years,” Tumin said.
Tumin recommended shopping around for the best rate, particularly if you currently keep your savings with a brick-and-mortar bank.
He pointed to data showing that, while savings yields for traditional retail banks increased only to 0.3% over the past year, the average yield at online banks shot up to 3.31%.
“I think the biggest bang for the buck for the average person out there is to just to open up an online savings account,” Tumin said.
It could be a good place for your emergency fund or goal-specific savings, Tumin said. “You can earn a whole lot more (than in years past).”
2. CDs have higher returns...
Much like the other kind of CD, certificates of deposit fell out of fashion in recent years, as historically low interest rates translated to negligible returns.
But now, many consumers have found that the savings product is worth a second look, said Ashley Cumberbatch, Charlotte-based N.C. branch banking market leader for U.S. Bank.
“There are some customers who have simply not been in an environment before where having a CD was advantageous,” Cumberbatch. “There’s a large segment that aren’t familiar with them.”
A certificate of deposit is a savings product that holds a fixed amount of money for a fixed period in exchange for interest. When you redeem the CD, you get the money you deposited plus the interest.
“It’s an account that offers you a higher rate than a traditional savings account, in exchange for leaving your money untouched for an agreed amount of time,” Cumberbatch explained.
If you can part with the cash, she said, CDs are an increasingly attractive way for the average consumer to earn more on their savings.
According to Bankrate, the national average rate for a one-year CD started out at 0.14% last year. By the end of the year, it had risen to 1.38%.
“It’s a great time to take advantage,” Cumberbatch said.
If you’re considering a CD for the first time, she recommended visiting a bank branch to discuss the size and term length of the certificate, in addition to how it could fit into your savings strategy.
“One of the most important pieces is making sure that the term length lines up with the customer’s savings goals,” Cumberbatch said, noting that withdrawing funds before the term length expires could lead to lost interest. “They do (need to) choose that term length so that they are comfortable not using those funds for that segment of time.”
3. … but there’s a catch.
It’s worth examining how your chosen savings vehicle compares with inflation and evaluate your return in context, Tumin said.
At its highest point in July, the inflation rate reached 9% — though it fell to a more modest 7.1% by November. By comparison, a CD with a higher than average rate of return still pays interest in the range of 3% to 5%.
Some savvy bank customers are trying to find a way around that, Tumin said. They’ve opted to purchase five-year CDs with a high interest rate now in the hope that price increases will cool by the time the term length expires.
Savings products like CDs or high-yield accounts also have another silver lining, Tumin said: they pose a low-risk, peace-of-mind alternative to investments in stocks and bonds that soured over the last year.
“It’s definitely been a tough year for investors,” Tumin said. “With (savings), they don’t have to worry about a loss.”
This story was originally published January 11, 2023 at 6:01 AM.
