Deposit Rates Heading Higher as the Top Savings Account Rate Hits 1.05 Percent

Banks and credit unions are getting a head start on increasing deposit rates even though the Federal Reserve hasn't increased the federal funds rate yet. Over the past several months, many financial institutions have increased savings rates, money market rates and CD rates. As a result, we have three banks with savings rates at or just above 1.00 percent.

The last time at least three banks were offering savings rates at or above 1.00 percent was back in August 2012. That week, the best savings rate was at 1.04 percent with an APY of 1.05 percent. You can read more about rates in August 2012 in this article: Savings Rates Averaging 0.55% in Bankrate’s National Survey.

We can safety say deposit rates have bottomed out and will be heading higher over the next several years. When rates take off and how high they will go depends on the Federal Reserve. Deposit rates are tied to the federal funds rate so when the Fed increases the rate, deposit rates move higher. When the rate is lowered, deposit rates move lower.

The current consensus is that Fed will start increasing the fed funds rate sometime in the summer of 2015. We are finally only months (and not years) away from a rate increase. This all naturally depends on continuing economic growth and a lower unemployment rate. While the United States is about to start an uptrend in interest rates but the same can't be said for the European Union.

Slow economic growth or an outright contraction in some economies in Europe is keeping a lid on interest rates in the E.U. There is even talk about some kind of quantitative easing to help stimulate growth. Any slowdown in the E.U. will only have a minor impact on economic growth in the U.S. and not derail interest rates moving higher.

The first increase in the fed funds rate will probably be 25 basis points in the summer of 2015. Soon after, the first increase in deposit rates will follow and will also be 25 basis points. At that point, the highest savings rates will likely be around 1.30 percent to 1.50 percent.

Subsequent increases in the fed funds rate and deposit rates will also be in 25 basis point increments. If economic headwinds pick up steam, unemployment drops quicker, or if inflation rears its ugly head, the increase rates will be sharper and we would see 50 basis point increases after each Fed meeting.

The current Fed calendar for 2015 has the Fed meeting eight times in 2015. The first possible increase in the fed funds rate will probably happen in the June 16-17 meeting. The Fed meets four more times after the June meeting so if all goes as planned, the fed funds rate will probably be near 2.00 percent by the end of 2015. This would put the best savings rates and money market account rates around 2.50 percent to 3.00 percent.

In September's meeting, the Fed polled their participants on where they believe the fed funds rate would be. Estimates range between the current rate of near zero percent all the way up to 2.875 percent. The estimate that gets the most projections is 1.875 percent, which is where four participants believe the rate will be by the end of 2015.

Rates are moving higher in 2015, 2016, and beyond. The most important step you can take to maximize your return is to either stay invested in variable rate accounts or short term certificates of deposit. Don't lock into a long term CD at current low rates. If you prefer a CD over a savings account, stick to CD terms of 1 year or less.