When will savings account rates rise, and where are the best savings accounts?

Though the Federal Reserve’s interest rate hike last week — and nod to more rate hikes to come — sent groans through the pool of aspiring home and car buyers hoping to keep borrowing costs low, it may spell good news for some consumers: those hoping to earn a little more on their savings accounts. “In the past few months we’ve already started seeing increases to the interest rates that banks are offering on deposit accounts, but it’s likely that we’ll see even more now that the Fed has announced a rate hike,” says Chanelle Bessette, banking specialist at Nerdwallet. 
Adds Ken Tumin, founder of DepositAcounts.com: “Several online banks have recently increased their savings account rates in the last two months, even before the first Fed rate hike,” adds Ken Tumin, founder of DepositAcounts.com — with potentially more increases to come, pros say.

So how does this all work exactly? “When the Fed increases interest rates, it becomes more expensive to borrow, which means consumers typically pay higher interest rates on mortgages and loans,” explains Bessette. “And because banks are lending their money at a higher rate, [that] means banks can pay their customers more interest on their checking, saving and certificate of deposit accounts,” says Bessette.

In other words: “The rising tide means banks often pay higher rates on savings and other deposit products to keep the deposits they have and bring in new deposits. But this relationship isn’t perfect, as banks with lots of deposits don’t have to competitively price in order to retain or attract new deposits,” says Greg McBride, chief financial analyst at Bankrate. (This site offers a summary of deposits at banks, but note that it is only updated annually.) 

To be sure, banks are under no obligation to raise your interest rate on your savings account, and not all of them will do it: “Banks are free to delay or avoid rate hikes on savings accounts based on factors like deposit needs,” explains Tumin. Indeed, Tumin adds that many banks, especially the large ones, have become flush with deposits while loan demand has been weak in the last two years. And that may mean they’re in no rush to raise their savings account rates regardless of Fed rate hikes. But others face different issues: “Some have seen loan demand increase while deposit levels have been inadequate,” he says.

Where experts predict you’re likely to find the highest interest rates on savings accounts

“Online banks have a history of hiking their savings account rates aggressively as the Fed hikes rates,” says Tumin. To find banks that are already paying high rates, McBride says: “There are plenty of online banks offering competitive yields to customers nationwide, often with very minimal or no minimum deposit. Everyone needs emergency savings and these accounts are literally in reach of everyone.”

Bottom line: “Where you keep your savings is going to be very important these next couple of years because banks will raise payouts on savings at varying speeds and some won’t at all. The online banks and smaller community banks that already pay competitive returns are those most likely to boost rates further to stay competitive,” McBride predicts.