The Federal Open Market Committee (FOMC) meets throughout the year to make decisions regarding the U.S. economy. One decision discussed in these meetings is whether the Federal Reserve’s benchmark interest rate should remain the same or be adjusted.
The federal funds rate is the rate at which banks and credit unions borrow and lend money to each other. When the rate is adjusted, banks and credit unions tend to adjust the rates for consumer banking products, such as high-yield savings accounts.
On Sept. 18, 2024, after the most recent meeting, the committee announced it would cut the target federal funds rate by 50 basis points from 5.25%-5.50% to 4.75%-5.00%. Is now the time to move your money out of your savings account? Let’s discuss.
It’s wise to keep your cash in the bank
Don’t drain your savings account. Just because APYs will likely be reduced because of recent rate cuts doesn’t mean you should empty your savings account. Keeping extra savings in a bank account that earns interest is a good idea.
Our Picks for the Best High-Yield Savings Accounts of 2024
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Capital One 360 Performance Savings  APY 4.25% Rate info Min. to earn $0 Member FDIC. |
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Discover® Online Savings  Min. to earn $0 Member FDIC. |
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American Express® High Yield Savings  APY 4.25% Rate info Min. to earn $0 Member FDIC. |
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Even if your savings account APY lowers, you’ll continue to earn interest. But you won’t get rewarded if you put your cash under your mattress or transfer it to your checking account.
However, the savings account you have matters. Choosing a high-yield savings account over a traditional savings account is a good move. High-yield savings accounts typically offer more generous APYs than standard savings accounts — so you can earn more as you save.
How much will savings account rates change?
Now that the target range for the federal funds rate has been reduced, you’re probably wondering if your savings account rate will change and how much APYs will be reduced. For starters, yes — you can expect to see rate adjustments.
Banks will likely act promptly by reducing APYs, but we’ll have to wait and see how much they change. Many of the best high-yield savings accounts offer APYs that are at or slightly below the federal funds rate.
You can expect to see a reduction in APYs. Since the target federal interest rate is now 4.75% to 5%, savings account APYs will likely shift below 5%. In alignment with the federal rate cut, the best high-yield savings accounts could offer reduced APYs of around 4.5%.
How much less will you earn from interest?
With a lower APY, you’ll earn less interest. Let’s take a look at how much the best savings accounts might earn in one year with an APY of 4.5% instead of 5.0%:
| Balance | Annual Yield at 5.0% APY | Annual Yield at 4.5% APY | Difference in Annual Interest Earnings |
|---|---|---|---|
| $500 | $25.00 | $22.50 | $2.50 |
| $1,000 | $50.00 | $45.00 | $5.00 |
| $5,000 | $250.00 | $225.00 | $25.00 |
| $10,000 | $500.00 | $450.00 | $50.00 |
| $20,000 | $1,000.00 | $900 | $100.00 |
Source: Writer’s calculations
As you can see, the difference in how much you earn from interest isn’t earth-shattering. Keeping your extra cash in an interest-earning bank account is worthwhile even when rates are cut.
Lock in higher rates with a CD
Keeping the money that you need for emergencies in a high-yield savings account is wise. Why? You’ll earn interest and can easily access your money at any time without penalty.
But if you don’t plan to spend your savings within the next few months or years, consider opening a certificate of deposit (CD). You may benefit from a higher APY than what your high-yield savings account offers.
But here’s the best part: You don’t have to worry about rate changes. CDs allow you to lock in an interest rate for a set period. But many CDs have penalties if you take your cash out before the CD matures, so this is best for savings you don’t need to access anytime soon.
Do you have savings you don’t need immediate access to and want to maximize the interest you earn? Review the best CD rates to learn more. But don’t delay, because CD APYs could change soon. Locking in a good rate before that happens is ideal.
Don’t let rate cuts stop you from saving
If you’re prioritizing savings goals, keep stashing away money. But ensure you’re taking advantage of the chance to earn interest by keeping your money in a bank account that earns interest. Every dollar you earn from interest can help you get closer to reaching your goals.
