What the Fed’s Interest Rate Decision Means for Savers (2024)

Banks and credit unions have started slowly lowering the interest rates they pay savers amid expectations that the Federal Reserve will eventually cut a key benchmark rate. But with the central bank expected to move slowly, the most generous institutions could keep their yields high into next year.

For the past year, Americans willing to do a little shopping have been able to find high-yield savings accounts and certificates of deposit yielding more than 5% thanks to Fed policy. Those opportunities still exist. However, experts say the falling nationwide average rate on savings accounts, which declined to 0.45% at the end of May from 0.47% two months earlier, suggests rates have likely peaked.

That savings yields above 5% are still available would have been hard to predict a few months ago. Late last year, the Fed was widely expected to cut the benchmark federal-funds rate in 2024 as many as six times. But at the conclusion of its June 11 and 12 policy meeting, the central bank announces that it’s keeping its rate target between 5.25% and 5.5%—right where it’s been since July of 2023.

“I wouldn’t be surprised if we didn’t have any Fed rate cuts this year,” says Bob Peterson, a financial advisor in Lake Forest, Ill. “But when the Fed does start cutting, you will see rates on savings accounts and on money-market funds go down.”

Why rates have remained so high

The Fed began raising rates in March of 2022, when they were virtually zero, to fight rising inflation. Even though inflation has fallen from a June 2022 high above 9% to 3.4% now, it has remained stubbornly above the central bank’s 2% target. Fed officials fear that cutting rates in this environment could reignite higher levels of inflation.

That explains why savings and CD rates above 5% are still available. While the Fed doesn’t directly set deposit interest rates, banks and credit unions typically adjust their rates in response to changes in the fed-funds rate, which influence the overall interest rate environment.

Savings accounts paying 5.25% interest were recently being offered by several banks. One-year CDs, meanwhile, were paying appreciably more. Kenowa Federal Credit Union offered 5.75%, while Kings Peak Credit Union was paying a 5.65% yield, as was Del Norte Credit Union for a 13-month CD.

It isn’t possible to say how long such rates will last, but trading in the futures market, which amounts to betting on rate changes, suggests that the Fed won’t start cutting until mid-September at the earliest.Fed officials are now projecting one rate cut this year.

The Fed typically lowers its fed-funds target by a quarter of a percentage point at a time, and the market expects it to do so three times by the start of May next year. That would leave its target between 4.5% and 4.75%, still higher than any time since 2007. And rates paid by the most generous banks and credit unions would likely remain well above the rate of inflation.

Peterson expects the central bank to take a slow course “unless the economy gets to some real stress” and needs a quick boost, he says. What’s more, he thinks the fed-funds rate could bottom out around 3% or 4%, rather than dropping to zero, which is what led to universally paltry savings yields for several years before the pandemic.

Looking beyond bank accounts

Savings accounts and CDs aren’t the only safe, lucrative place to keep your cash. Money-market funds may provide a little more yield than savings accounts. The Vanguard Federal Money Market Fund, for example, was recently yielding 5.28% with a minimum required investment of $3,000. Money-market funds are considered as low risk as an investment can get.

Then there are Treasury bills: A one-year Treasury recently yielded 5%. Treasurys can be bought and sold via online brokerage accounts, or bought directly through a TreasuryDirect account, which is easy to set up. “I think the only barrier to Treasurys is just the public’s confusion on how to buy them,” says Peterson.

Peterson adds that his firm has started buying Treasurys and CDs with terms of up to 14 months. Should the Fed start cutting rates in the next several months, those clients will continue to earn strong yields even as banks start to lower the rates they’re paying.

Choosing a bank or credit union

Those who choose a bank savings account or CD will often find the best rates at smaller or online institutions, with names that may not be familiar. Because such banks don’t have the brand recognition of the biggest institutions, they often offer higher yields to attract deposits. As long as the bank is a Federal Deposit Insurance Corp. (FDIC) member, deposits are insured up to $250,000 per individual and $500,000 for joint accounts.

Credit unions offer the same protection with membership to the National Credit Union Administration (NCUA). “Look for the FDIC or NCUA sticker so you know your money is safe,” says Adam Stockton, head of retail deposits at research firm Curinos.

Be sure to read the fine print when opening an account. A CD might offer an attractive rate, but only on $5,000 of your $25,000 deposit, for example. A savings account might come with hidden fees or minimum balance requirements.

Those who are still earning next to nothing on their cash can do a lot better by moving it to another bank. But earning the highest yield isn’t every consumer’s priority, says Stockton.

“Some consumers want their deposits at the same bank that has their mortgage, their credit card, their line of credit and their investment accounts,” he says. “And maybe that means they’re giving up a little bit of yield for the convenience.”