- The interest rates on your savings and loans are influenced by what the Federal Reserve does.
- The Fed cut rates more than once in 2024, which has stirred savings rate declines.
- 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.
Factors influencing savings account interest rates
The interest rate on a high-yield savings account fluctuates and isn't fixed, like CD rates. This means if you open a high-yield savings account, it's normal to see the interest rate go up or down over time.
Fed meeting decisions, bank competition, and economic conditions all play an important role in influencing savings account interest rates.
Fed meeting decisions
Savings account interest rates may increase or drop after a Fed meeting. The Fed meets eight times a year, and more can be scheduled if necessary.
When the Federal Reserve raises the federal funds rate, it affects the interest rates of banking products like mortgages and savings accounts.
"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, CFP® professional and CEO at Blue Ocean Global Wealth.
When the Federal Reserve decreases the federal funds rate, the opposite will happen. You'll see high-yield savings rates drop and get less competitive while student loans, car loans, credit cards, and mortgages get more attractive for lenders and borrowers. This typically encourages consumer spending.
Bank competition
Competition between banks can also impact savings account interest rates. Banks want to provide competitive offers to appeal to new customers, so they have their own criteria for changing rates.
Occasionally some offer specials with a higher interest rate. You might need to meet certain requirements to earn the highest possible annual percentage yield (APY), such as making a large upfront deposit or maintaining certain money in your account for an extended period of time.
You'll also see that savings account interest rates may shift differently. Timing can be an essential component of changing rate environments, so you might see some banks hold onto higher rates for a bit longer to attract more new customers. You also might see banks that incrementally drop rates, while others may have significant rate drops.
Economic conditions
Economic shifts can also influence savings account interest rates. For example, if inflation begins to rise a bit or economic conditions are uncertain, you might see some banks raising savings rates while others dropping rates.
Current savings interest rate trends
Savings interest rates rose in 2022 and 2023 as the Federal Reserve tightened monetary policy to combat inflation. Then, once the Fed got closer to reaching its target rate of 2%, it started cutting rates.
During the first half of 2024, savings account interest rates fluctuated slightly depending on the bank, but they mostly remained pretty stagnant overall and comparable to 2023 savings rates.
In the second half of 2024, savings account interest rates started to decline and become less competitive. While there used to be numerous 5% interest savings accounts, they've become much harder to find. The most competitive offerings are now around 4% to 5% APY, whereas earlier in 2024 top savings rates stood at 5% to 5.5% APY.
Predictions for savings account interest rate trends
The savings rate forecast indicates that rates will likely decline further in 2025 if the Fed continues to cut rates. Savings account interest rates will likely start to get less competitive, although we'll still see rates higher than the ones offered in 2020 and 2021, at least for the beginning of 2025.
According to the CME FedWatch Tool, there's a high likelihood that the Fed will drop rates several times in 2025.
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 an emergency fund.
"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 savings 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
No. Interest rates have started declining. In September 2024, the Fed cut rates for the first time in four years and has cut rates further since then.
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.
