Learn About High Yield Savings Accounts
When people like you and I deposit ca$h money into a bank, the bank uses that money for a varity of investing activities. At the end of each business day, every bank must ensure that they have a certain percentage of deposits as cash reserves to be able to give you back money when you want to withdraw it.
Banks that have a shortfall (fall short of having enough $$ to meet total withdrawals) can borrow from other banks that have an excess of cash on an overnight basis. The rate at which these banks borrow from and lend to each other is called the Federal Funds Rate and is set by the Federal Reserve.
By increasing this rate, the Fed effectively makes it more expensive for banks to conduct their daily activities. Consequently, the banks pass this cost onto consumers in the form of higher loan rates and mortgage rates.
However, banks still want as many deposits as possible. Since fewer people are taking out loans because of the prohibitive cost, banks turn to raising interest rates on savings accounts to attract customers.
Why does the Fed do this? To put it simply, the Fed is intentionally removing money out of the economy by punishing spenders and rewarding savers. Doesn’t this seem counterintuitive?
For a myriad of reasons, inflation has been stubbornly high since the pandemic. CPI, an inflation measure, hit a high of 8.6% in 2022, levels not seen since the 1980s. You’ve likely felt this pain at grocery stores, gas stations, and especially when booking that summer vacation.
By increasing rates, the Fed hopes to reduce the supply of money circulating in the economy by encouraging less spending and more savings. Theoretically, this will tame inflation and bring costs back down to earth.
During periods of Fed hikes, it behooves you to put your money into a high yield savings account rather than your typical savings account at a large bank. Below is a list of the highest yileding interst bearing savings accounts in 2023:
SoFi - 4.5% interest rate
Discover - 4.30% intrest rate
Ally Bank - 4.25% interest rate
Marcus by Goldman Sachs - 4.15% interest rate
American Express - 4.15% interest rate
