Interest Rates Are Near Historical Averages Right Now. Here's Why That's Great for Your Savings

Interest rates continue to be in the news, with people wringing their hands and howling at the sky about just how high rates have gotten. The problem with this, of course, is that rates aren't that high. And even if they were, higher rates aren't necessarily a bad thing, given where they were.

In fact, we're very close to historical averages when it comes to both the federal funds rate and the 30-year fixed-rate mortgage average. Of course, the federal funds rate, being the price it costs for banks to borrow money from one another, also heavily influences the interest you get from savings products like certificates of deposit (CDs) and savings accounts.

Historically average rates

When I say that rates are historically average, what does that mean, really? Well, it means that various agencies in charge of numbers like these have been keeping track of them for a very long time, and we can see exactly what is average for the data we have, even if your heart feels otherwise. The numbers don't lie.

While it's true that the federal funds rate was near zero from 2009 through most of 2015 and again from mid-2020 to mid-2022, this is hardly normal for interest rates. Both of those rate dumps were in response to very challenging economic environments, which pushed mortgage interest rates to almost nothing but also depressed savings rates to the point of futility.

Historically speaking, the federal funds rate's lifetime average is 4.61% as of June 1. We're currently at 5.33%, which is technically higher than average, but not significantly so. It's about 0.75% -- that's not nothing, but it's hardly the interest rate crisis of the 1980s.

The 30-year fixed-rate mortgage is currently at 6.87%, as of July 1, vs. a lifetime average of 7.73%. That's actually slightly low, despite all the moaning to the contrary.

Those two measures are what we generally think about when we think about "interest rates" -- but measures like CD rates tell us far more about what our savings accounts may or may not be doing.

The benefit of average rates for your savings

Data was a bit scant for savings accounts and didn't cover as many years as I wanted to see, so instead I'm going to talk about your savings through the medium of that precious product, the certificate of deposit. Of course, your experience may vary, your bank may offer different rates, and so forth. These numbers are national averages based on bank reporting.

The average rates for CDs right now are in the low- to mid-5% range, depending on the product you choose. We're going to specifically look at 6-month, 12-month, and 24-month CD options. I made a little chart of historic average rates to use for this thought experiment.

As you can see, everything rises and falls together, more or less. So interest rates being up to near-historical averages gives you more options for passive income with your money.

If you had invested $10,000 in a 12-month CD in 2021 at 0.10%, for example, you'd have gotten a meager $10 back out after a year. Compare that to a 12-month CD you buy today at 5.09%. At the end of the year, you're walking away with $521.04 -- a whopping 5,110.4% increase. And while that gain to you comes at the same time as a loss to someone else, their loss is not nearly as significant.

Let's say someone borrows $300,000 to buy a home at 2021 rates -- 2.96%. Their 30-year fixed rate mortgage in 2021 costs them $1,258 in principal and interest each month. What if they borrowed that same amount today at 6.87%? Their payment is now $1,970 per month. They also saw an increase, but to the tune of 56.6%, not over 5,000%. Even though they're paying more for their home, they're also winning if they have anything to put into savings after closing.

Don't bank on higher rates, but do thank your lucky stars for historical averages

For all the complaints about higher interest rates, the truth is that we need balance in the system. There's no world where it's right that $10,000 worth of savings should earn just $10 in returns, even if that means that home buyers have to pay a bit more interest now. The system rises and falls together.

For savers, historical average rates also means it's a great time to open a high-yield savings account or a CD and reap the benefits of the 5,000% increase in savings account interest rates. Let that interest compound and that savings account grow unhindered by a low interest environment.

It's always a fine line between our budgets, our savings, and our income, but the most fair place for everyone to be is closer to the middle.