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- The interest rates on your savings and loans are influenced by what the Federal Reserve does.
- The Fed last raised rates in July 2023 and is expected to cut rates in September.
- It's still beneficial to save money in a savings account for short-term goals, regardless of rate trends.
You may have noticed that the interest rate on your high-yield savings account is changing. Why did this happen? We'll explain how interest rates change and what to expect in the future.
Understanding interest rates and how they're determined
What are interest rates?
When borrowing money, the interest rate is part of the fee you pay the lender to access funds. The lower the rate, the cheaper it is to borrow money.
As a saver, you benefit from high interest rates when you keep your money in a bank account. The financial institution is essentially paying you a fee — rather than charging it — to store your funds. This benefits banks because it increases their reserves, allowing them to lend out more money and generate revenue.
How are interest rates determined?
The Federal Reserve is the central banking system in the U.S. It's in charge of making decisions about monetary policy.
The Federal Reserve uses the federal funds rate — the interest rate banks use when lending money to each other — as a tool for regulating economic activity.
When the Federal Reserve raises the federal funds rate, it affects the interest rates of banking products like mortgages and savings accounts. Savings rates may increase or drop after a Fed meeting.
"The pros are if you're a receiver, you can see higher rates on your high-yield savings. Now, if you're a borrower, it's costing more money to borrow, whether that's a student loan, car loan, credit card, or mortgage," says Marguerita Cheng, a CFP professional and CEO at Blue Ocean Global Wealth.
The interest rate on a high-yield savings account fluctuates and isn't fixed. This means if you open a high-yield savings account, it's normal to see the interest rate go up or down over time.
Factors influencing savings account interest rates
Savings interest rates rose in 2022 and 2023 as the Federal Reserve moved to combat inflation by tightening monetary policy.
"A way to countermeasure the inflation is to have a tightening, and that means raising interest rates to make it more expensive for people to borrow money. It's their primary mission to manage inflation without causing the economy into a serious recession," Cheng says.
When the Federal Reserve raises rates, the interest rate on your savings account will generally go up, as will credit card rates and mortgage rates.
If the Federal Reserve lowers interest rates, savings and borrowing interest rates will usually drop. This typically encourages consumer spending.
So far in 2024, you might have seen savings account interest rates fluctuate slightly depending on where you bank, but they've likely remained pretty stagnant overall and comparable to 2023 savings rates.
The savings rate forecast 2024 indicates that while savings account interest rates have remained competitive for the first half of 2024, it's likely that rates have peaked. National savings account interest rates will likely begin to drop more in the future, impacted by the Fed's decisions.
According to the CME FedWatch Tool, there's over a 90% chance that the Fed will drop rates at its September meeting, which could influence savings account rate decreases.
How to respond to changes in savings account interest rates
Cheng says everyone — regardless of whether you've just graduated from high school or just retired — can use a combination of savings and investing for your short-term and long-term goals.
If you're concerned about inflation eroding your savings, Cheng recommends saving just enough money for everyday needs or emergencies.
"We need cash for liquidity for any emergencies or opportunities," says Cheng. "But you don't want to have too much money in cash."
It's still worth opening a high-yield savings account before interest rates fall or even after because they will continue to outearn traditional savings accounts regardless of the economic conditions. In particular, they can be useful for short-term financial goals, like buying a car or saving money for a vacation. They may also be used for storing an emergency fund, which financial experts recommend should be stocked with at least three to six months' worth of living expenses.
Savings account interest rate FAQs
The Federal Reserve last increased interest rates in July 2023, to a target rate of between 5.25% and 5.50%. Since then, the Fed has kept rates steady while inflation cooled but is expected to cut rates at its September meeting.
Rising interest rates usually lead to higher mortgage rates overall, which can increase monthly payments on new home loans or variable-rate loans. However, the rate individual homeowners qualify for is also influenced by a variety of personal factors, including credit scores, the type of loan, and the down payment.
Rising interest rates are good for savers, who can earn more on their interest-bearing deposits. The best banks will offer an APY that's equal to or higher than the rate of inflation, ensuring that customers do not lose purchasing power.
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