Savings Account Rates: What’s Next?
The Current State of Savings Account Rates
If you’ve been keeping an eye on your savings account, you’ve likely noticed that interest rates have taken a hit. Just a few months ago, it was possible to earn an annual percentage yield (APY) of up to 5%. Now, the top savings account rates hover around 4% APY, and they’re still falling.
How Banks Set Interest Rates
Savings account rates are variable, meaning they can increase or decrease at any time. Banks, as private businesses, set their rates as they see fit. They may raise interest rates to attract new customers and increase cash reserves, or lower them to reduce the expense of paying interest. However, savings rates are also influenced by the federal funds rate, which is set by the Federal Reserve.
The Federal Reserve’s Impact on Interest Rates
The Federal Reserve sets the federal funds rate to meet its economic objectives, including maintaining an inflation rate of about 2%. When inflation is high, the Fed hikes the federal funds rate to slow economic growth, and interest rates on loans and deposit products follow suit. Conversely, when the Fed wants to stimulate the economy, it lowers the federal funds rate, making borrowing easier, but also reducing interest earnings for savers.
Historical Context: Where We Are Today
Despite the recent decline, interest rates on savings accounts remain elevated by historical standards. The national average savings account rate is currently 0.43%, nearly seven times higher than the average rate in 2022. This is thanks to a series of interest rate hikes by the Fed to combat inflation.
What’s Ahead for Savings Account Rates?
Experts believe the Fed will lower the fed funds rate again, but when that might happen isn’t certain. According to the CME FedWatch Tool, there’s a nearly 67% chance the Fed will cut its rate by 25 basis points at its December meeting. If it does, we can expect savings account rates to drop further in 2024.
Exploring Alternative Options
While savings accounts have variable APYs that fluctuate along with market conditions, CDs offer fixed rates for the duration of their term. You can lock rates above 4% APY with CDs from leading banks. However, there is a catch: The money deposited into a CD cannot be withdrawn until the CD reaches its maturity date. One way to preserve some liquidity while securing the higher CD rates is by creating a CD ladder.
Maximizing Your Savings
To make the most of your savings, consider exploring alternative options like CDs and money market accounts. By understanding how interest rates are set and what’s driving their changes, you can make informed decisions about your savings strategy.
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