Don't assume the interest on your savings account is keeping up with Federal Reserve rate hikes. Here's why

  • You may assume the Federal Reserve rate hikes mean you are making higher interest on your cash.
  • Here’s why you could be wrong.

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As the Federal Reserve continues to hike interest rates, you may assume you’re earning more on the money in your savings account.

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But that may not be the case.

Carolyn McClanahan, a certified financial planner at Life Planning Partners in Jacksonville, Florida, was recently surprised when a client told her he was hardly making any interest on his cash.

The interest rate on his Capital One account was 0.3%, far lower than the 3.3% annual percentage yield the firm is currently advertising for new savings accounts. McClanahan discovered the same situation when she checked her own Capital One account.

“I was not happy,” McClanahan said.

While a call to Capital One’s customer service revealed it was possible to access the higher interest rate by opening a new account, McClanahan decided it was better to move the money elsewhere.

“I’ve been recommending Capital One for a long time, and they are now off my list,” McClanahan said.

Capital One did not immediately respond to requests for comment.

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The Federal Reserve has raised the federal funds rate to the highest levels since 2007. While that makes borrowing more expensive for credit cards and other accounts, the expectation is that it will also push up the interest consumers can make on their cash savings.

Some online savings accounts are touting rates as high as 4%. Some certificates of deposit, or CDs, may provide higher rates, depending on the term.

Rates are expected to climb even higher as Federal Reserve poised to continue its hiking cycle in 2023. predicts top-yielding national money market and savings accounts could climb to 5.25% by year end.

Yet like McClanahan, others may be in for a surprise if they realize their accounts are not keeping up with those top rates.

“Consumers need to check their accounts at least once a month to see what their accounts are earning,” said Ken Tumin, senior industry analyst at LendingTree and founder of Deposit Accounts.

“Don’t assume it’s the latest greatest rate,” he said.

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Following Fed rate hikes, online savings accounts should generally be in the ballpark of the federal funds rate within about a month, according to Tumin.

There are signs that may help consumers spot when they may get shortchanged on rates.

Watch for changing account names, Tumin said. If a bank is touting savings offers under a new account name from when you opened your account, the terms you are subject to might not be the latest.

If you see a new account, often you can request to be upgraded.

“That’s an easy way to get the benefit of the higher rate,” Tumin said.

Also be more vigilant when a bank, such as Emigrant Bank, has more than one online division, Tumin said. In September, Emigrant’s Dollar Savings Direct division was the first to offer 3% on an account, which eventually climbed to 3.5%.

Now, however, its My Savings Direct division has the highest rate for an online account, with 4.35%, Tumin noted.

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