17 May Higher interest rates and your savings

Q. If interest rates are going higher for mortgages, they will be higher for savings accounts and CDs too. How long will it take for rates to go up, and how can I find the highest paying savings accounts and CDs?
— Investor

A. The interest rates that affect fixed rate mortgages are different from the interest rates that you receive from your savings account or CDs at the bank.

The Federal Reserve controls short-term interest rates, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.

He said these short-term interest rates, called the “federal funds rate,” are the rates that banks charge each other to borrow money.

“The Fed will lower or raise short-term interest rates to try to help speed up the economy or slow it down,” Power said. “These are the rates that affect your savings account, CDs and variable rate loans like home equity loans or variable rate mortgages.”

Power said the Fed started to raise short-term interest rates in December 2015, and then raised them again this past December. He said it’s anticipated the Fed will raise rates three more times in 2017 but that will depend on who the economy is doing.

“If they raise rates too fast, it could slow the economy down and put the U.S. in a recession, so they have to be very careful and deliberate with their decisions,” he said. “But over the next few years, you should see savings and CD rates slowly but surely going higher.”

A “traditional” mortgage like a 30-year or 15-year fixed rate mortgage interest rate is set by market forces beyond the lender’s control, Power said.

Ultimately, he said, the investors who will eventually buy your mortgage as a bundled investment will collectively determine the interest rate on these mortgages. A good proxy to look at on whether fixed rate mortgages are going up or down is the 10-year treasury yield, he said.

Power said you can do an internet search for the highest interest rates for CDs and savings accounts.

“Banks that offers higher interest rates over others are usually trying to attract deposits or have a lower cost of doing business — i.e. online banks that don’t have the overhead of a local branch system,” Power said.

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This story was first published in May 2017.