What the Fed Rate Announcement Means for Savings Accounts

Federal Reserve officials completed a two-day meeting on December 18 and announced a federal funds rate decrease of 25 basis points^[0]

Will high-yield savings rates go down?

Yes, it is likely that banks will change the interest rate on many of their savings accounts. The yields in the best savings accounts are still much higher than average, and will likely continue to be higher than average. But with today’s announcement, we expect to see more rate dips.

» Learn more: What the Fed rate decision means for CDs

What is the federal funds rate?

The federal funds rate, or the “Fed rate,” is the interest rate that banks charge each other to borrow money overnight. According to the Federal Reserve, institutions borrow money and lend from their reserves after hours in order to meet regulatory requirements and to be ready to manage market conditions.

The funds rate is set by the Federal Open Market Committee, which the Federal Reserve uses to help adjust monetary policy based on economic conditions.

For example, raising rates can help ease inflation: A higher federal funds rate generally leads to higher rates for loans or credit cards^[0]

When inflation is at or near desired levels, however, lowering rates can encourage more borrowing and spending.

Elevated interest rates and bank failures

Higher federal funds rates have implications for those who invest in loans and loan-backed securities, such as bonds. In an elevated rate environment like the one we’ve been in for the last year or so, bonds that were purchased previously, when rates were lower, tend to have less value than newer bonds that pay more interest. If you have a portfolio of lower-interest bonds and decide to sell them before maturity (say, you need extra cash to pay bills), you’d likely have to sell them at a loss.

The same interest rate risk can also apply to banks that hold bonds as part of their portfolios. On March 8, 2023, Silicon Valley Bank, headquartered in Santa Clara, California, announced that it sold a large portion of its bonds at a loss of $1.8 billion. Reportedly, the bank’s announcement led to a sense of panic that caused clients to pull their deposits out of the bank (what’s also called a bank run), ultimately leading to SVB’s collapse.

Since SVB’s failure, more banks have collapsed. Two notable failures are Signature Bank, based in New York, and San-Francisco-based First Republic Bank. Those financial institutions also reportedly faced problems competing in a higher-rate environment, with subsequent substantial withdrawals from customers.

Does the Fed rate affect FDIC insurance?

The federal funds rate is a separate subject from federal insurance, which allows bank customers to access their deposits in the event of a bank failure. Some accounts at banks, such as savings accounts, are typically federally insured by the Federal Deposit Insurance Corp., up to $250,000 per depositor, per ownership category (joint owners or a single owner, for example), per insured bank. If a bank fails, depositors can still access their money, up to the insured amounts.

If earning higher rates in your savings account means your balance will go above federal insurance limits, consider one of these strategies for protecting your money if you’re banking over $250,000. » Want to dig deeper? Read more about FDIC insurance at banks and NCUA insurance at credit unions

Take advantage by choosing a high-yield account

Any time there’s a Fed rate announcement, it’s a good idea to check the interest rate on your savings accounts and shop around to see if there are better options. Not every bank offers strong rates. Some consistently offer a low APY of around 0.01%, and the national average savings account rate is only 0.42%, according to the FDIC.

But online savings accounts tend to offer better rates — many times higher than that average — because institutions that offer these accounts don't have to operate expensive brick-and-mortar branches and can pass the savings on to customers in the form of higher rates and low (or no) fees.

Do high-yield savings account rates change?

High-yield savings account rates are variable and can change at any time. This is true for accounts with any kind of rate — whether it's low or average or high. But the best savings accounts tend to offer consistently higher rates compared to their competition. A higher APY can make a visible contribution to your bank balance. Say you have $10,000 in a savings account that earns a low 0.01% APY, which is typical for large banks. After a year, that balance would earn only about a dollar in interest. But put that amount in a high-yield savings account that earns a 4% APY, and it would earn more than $400 after a year. That interest would also earn interest over time, a feature known as compound interest. High-yield savings accounts may not make you rich, but you’ll automatically earn much more than you would with a lower rate option.

» Want to learn more about how APY changes are measured? Read our primer on basis points

Use a savings calculator to determine what your bank balance can be with different APYs and see how your money could grow.

See how APYs have moved at high-yield accounts versus regular accounts

With inflation, why put money in any savings account?

Inflation erodes spending power, since it means goods and services are more expensive than they were previously. So when the inflation rate is considerably higher than the average national savings account rate — as it was for more than two years — it may seem that parking money in a savings account isn’t beneficial.

But the larger reason for saving cash is to have easy access to money in case you need it quickly, say, for an unexpected car repair expense. Setting aside funds for financial emergencies can help prevent you from going into debt, which can be costly, especially when interest rates rise.

Having at least three to six months’ worth of expenses tucked away in an emergency savings fund is ideal, but anything you can put away would help, and it adds up. For example, if you put $10 a week into savings and don’t have to dip into the funds, it’ll add up to more than $500 after a year. And having that money earn interest is a bonus way to have your dollars work for you.

If you have a fully funded emergency savings account, and you have extra cash that you don’t need to access right away, it may be worth looking at other short-term options to grow your money. Some certificates of deposit, for example, earn a better yield than even the best savings accounts. This is the case even though many of the best CD rates today are lower than they were at the beginning of the year. With a CD, you will need to leave the money parked in the account for a predetermined time period — a year or more, for example. For longer-term goals, such as retirement, it makes sense to look into investing.

The federal funds rate is worth paying attention to. When the Fed rate decreases, savings rates are likely to fall as well. But if you put your cash in a high-yield account, your money can still work hard for you and your savings balance can continue to grow.