What happens to your savings when the Federal Reserve cuts interest rates

Image Source: Getty Images

The Federal Reserve has yet to cut rates, but here’s what to expect when they do.

The Federal Reserve has been aggressively raising interest rates to cool the economy and keep inflation under control. As a result, many savings accounts are paying significantly higher interest rates than they did just a year ago. Most of the best high-yield savings accounts now have APRs in the 3.3% to 4% range, which was unprecedented not long ago.

Certainly, the Federal Open Market Committee (FOMC – the policy-making body of the Federal Reserve) is not planning a rate cut anytime soon. But what happens to savings account interest when that happens? Here’s what you need to know as we approach the expected late stages of the current rate hike cycle.

What does it mean for the Federal Reserve to raise or lower rates?

When you hear the Federal Reserve Board’s “increased rate,” you usually mean the Federal Funds Rate. Simply put, this is the interest rate a bank charges other banks for borrowing money. If the federal funds rate is raised, borrowing costs will be higher, effectively removing money from the economy. A lower federal funds rate encourages banks to borrow more money for the economy. The idea is that a lower federal funds rate will stimulate economic activity, and a higher federal funds rate is a useful tool to cool the economy.

Here we use the Federal Funds Rate as the base interest rate. Some key interest rates are derived directly from the Federal Funds Rate. A prime example of this is the US prime rate. Some consumer interest rates, such as his APR on credit cards, are directly linked to Federal Funds interest rates. Others, such as savings account interest rates, are not directly tied to it, but are still affected.

When will the Federal Reserve cut rates?

The short answer is that no one knows, but it’s very important to understand that the Fed is not. I want This is to keep interest rates higher than necessary.

As a few clues, the latest projections by actual policymakers call for the Fed funds rate to rise to about 5.1% by the end of 2023, so the current target range of 4.25% to 4.5% will be We are considering three more rate hikes. (Note: Federal Reserve rate hikes are in 25 basis point increments.)

However, the median prediction also has a rate fall 4.1% by the end of 2024 and 3.1% by the end of 2025. These projections are subject to change (and likely subject to change).

What does the rate cut mean for your savings account?

This is an important concept for savings account owners to understand.Your Savings Account Yield, or APY, is not directly connected In the movement of the Federal Reserve Board. In that case, savings account interest rates would be about 4.25% higher than they were a year ago at this time, but that’s not the case. In fact, a typical high-yield savings account is paying 2-3 percentage points more than it did before the Fed started raising rates.

However, savings rates tend to move in the same direction as benchmark rates. Therefore, he could see his APY paid out of his savings account decrease if the Fed starts lowering the federal funds rate later this year or sometime next year. It’s just a matter of how quickly and how much, and those two variables largely depend on the banks, not the Federal Reserve.