While there are upsides for consumers when interest rates come down, high-yield savings accounts will likely offer lower rates too. Above, Federal Reserve Chair Jerome Powell. Chip Somodevilla/Getty Images
Two years ago, the Federal Reserve had just started raising interest rates, from near zero, to try to bring down inflation.
At the time, the best high-yield savings accounts out there were offering less than 1% annual interest. Today, with the target range for the federal funds rate now 5.25 to 5.50%, a number of banks are offering savings accounts that pay nearly that much in interest.
“These rates have really run up very quickly,” said Ted Rossman, senior industry analyst at Bankrate.
And a lot of people are benefiting.
“We actually recently did a study and we found that 22% of Americans who have short-term savings are earning at least 4%,” Rossman said. Last year, just 7% of people were earning that much on their savings.
“This is the time to be a saver,” said Marguerita Cheng, a certified financial planner near D.C.
As rates have gone up, she’s had clients of all ages coming to her asking how to take advantage.
“They’re like, ‘Hey, can you tell me, should I open a high-yield savings account or a CD?’” she said. “I am having conversations every week with clients about this. Every week. It’s pretty exciting because that means that people are more engaged.”
These days, Cheng is also getting questions about when the Fed might start cutting rates — which it signaled last month it’s likely to do three times this year — mostly from clients who are eager to see mortgage rates come down.
While there are a lot of upsides for consumers when rates come down, she said, “the flip side of that is as the Fed is cutting rates, then the healthy interest that you have enjoyed on your high-yield savings accounts, those will go down as well.”
Interest rates on almost everything move when the Fed raises or lowers the federal funds rate — both the interest you pay on mortgages, credit cards and car loans, and the interest you earn on savings accounts and CDs, or certificates of deposit.
“But some move faster than others,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.
CDs, which require you to lock your money in for a certain amount of time, are among the first to follow the Fed when it raises rates or cuts them, he said, partly because they’re in a competitive market where people shop around.
“It’s pretty quick for CDs,” Gagnon said. “As you get to other types of bank accounts, it gets slower and slower. And when you get to checking accounts, it gets, you know, glacial, if that.”
Banks have already started lowering interest rates on some longer-term CDs, even though the Fed hasn’t made a move yet — it’s just signaled it probably will.
Anastassia Fedyk, an assistant professor of finance at the University of California at Berkeley’s Haas School of Business, said that’s because interest rates on CDs are fixed.
“What that means is that it can actually be a little bit more responsive in a forward-looking way,” she said. “Because if you know you’re locking in somebody for five years, and you know that the rates might be cut in a couple of months, already you’re not going to be offering them that high rate.”
Whereas banks that offer high-yield savings accounts with variable interest rates “can afford to respond pretty much in real time, close to real time with a little bit of a lag,” she said.
Once the Fed does cut rates, though, you can expect your bank to cut your rate too. Even so, chances are that high-yield savings accounts will still be high yield, at least for a while.
“A few cuts is not going to get us anywhere near the zero-rate environment that we were in for so long,” Fedyk said. “The Fed is looking at maybe, like, three cuts by the end of the year.”
All likely in the range of a quarter of a percentage point, she said, which would keep the federal funds rate — and the interest on many high-yield savings accounts — above 4%.
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