Interest Rates Are Falling—What This Means for Savers

Cash is fanned out from a wallet in this photo illustration taken in North Andover, Mass., on June 15, 2018. Elise Amendola/AP Photo

Savers, be warned: The days of high-yield savings accounts are numbered.

In March 2022, the Federal Reserve embarked upon a campaign of higher interest rates to combat inflation. The central bank hiked rates 11 times, lifting them to a two-decade high of 5.25–5.5 percent.

This allowed savers to park their cash in low-risk investment vehicles—high-yield savings accounts, certificates of deposit (CDs), money-market funds, and Treasury bills—and generate solid returns of 4–5 percent.

Even billionaire Warren Buffett accumulated an enormous cash position, allocating a substantial portion of Berkshire Hathaway’s capital into Treasury bills and garnering tens of millions of dollars in monthly earnings.

Bankrate’s October survey of institutions showed the national average account yield is 0.57 percent, up from 0.06 percent at the beginning of 2022.

These numbers, however, could be changing heading into 2025.

After more than four years, the Fed cut interest rates in September, kicking off a new easing cycle with a jumbo 50 basis-point reduction to the benchmark federal funds rate. The central bank’s Summary of Economic Projections suggests that the median policy rate will fall to 3.4 percent by the end of next year and 2.9 percent in 2026.

Should the central bank follow through on its estimates, rates would still be higher than before the pandemic. In December 2019, the policy rate was 1.55 percent.

While the Fed has telegraphed incoming rate cuts, it is uncertain how much banks’ savings rates will drop and at what speed. Estimates suggest that there have been 53 decreases and seven increases in top CD rates.

It is also unclear if the coming low-rate climate would force savers to reconsider their love for cash and shift to investment alternatives that might offer better returns.

For now, savings accounts continue to be appealing for households preparing for a rainy day or setting aside cash for a vacation, says Justin Haywood, the president and co-founder of Haywood Wealth Management.

“Savings accounts are still attractive, even after the Federal Reserve’s recent rate cuts,” Haywood told The Epoch Times. “While the rates may not be as high as they were a couple months ago, they still offer liquidity and safety, making them a good option for short-term savings and emergency funds.”

According to a list compiled by NerdWallet, scores of financial institutions still offer impressive annual percentage yields (APYs).

EverBank, My Banking Direct, and Poppy Bank offer 5 percent APYs to clients. Others, such as CIBC U.S., BMO Alto, Barclays, Citibank, and Marcus by Goldman Sachs, provide more than 4 percent APYs.

By comparison, however, the APY for traditional savings accounts presented by large national banks, such as Bank of America, JP Morgan Chase, and Wells Fargo, is still as low as 0.01 percent. The big banks have had little incentive to bolster their rates on savings accounts because they maintain plenty of deposits on their balance sheets.

In September, Fed data showed that large commercial banks held nearly $11 trillion in deposits.

A Bank of America customer uses an ATM at a branch office in San Francisconon July 14, 2021. Justin Sullivan/Getty Images

But while consumers did not flee conventional institutions such as JPMorgan Chase or Citibank, consumers had taken advantage of the high-rate environment by allocating their excess cash to money market funds. These types of mutual funds invest in low-risk, short-term debt securities. In the second quarter, Fed data showed that the assets of these funds rocketed to an all-time high of $6.547 trillion.

Taking another look at a portfolio of savings, investments, and disposable cash might be an appropriate step heading into a new interest-rate era.

“Savers should continue to park part of their money in savings accounts or high-yield savings accounts for easy access and safety,” Haywood said. “However, for money that doesn’t need to be immediately available, investing in CDs or U.S. Treasurys could be more attractive due to their fixed interest rates and low risk.”

Treasury yields have unexpectedly risen following the Fed’s rate cut. The benchmark 10-year yield has topped 4 percent for the first time since August.

In addition, he says, individuals need to consider a diversified investment portfolio—a blend of equities and fixed income—for longer-term goals, Haywood noted.

The State of Savings

America’s personal saving rate fell to 4.8 percent in August, below the pre-pandemic level of above 6 percent.

Over the past couple of years, reports have highlighted how much inflation has affected households’ saving pursuits, causing many to fall behind on their financial goals.

This past spring, an Allianz Life survey found that more than two-thirds (69 percent) of Americans had not contributed to their savings as much because of ongoing inflation. Fifty-one percent even took on more debt due to price pressures.

“The rising cost of living is stretching American budgets,” Kelly LaVigne, vice president of consumer insights at Allianz Life, said in a statement. “Just because inflation has slowed doesn’t mean prices have gone down.”

Last month, the annual inflation rate slowed to a higher-than-expected 2.4 percent, the lowest in more than three years. However, cumulative inflation has ballooned by more than 20 percent, and Americans’ purchasing power has tumbled by 17 percent since January 2021.

Current economic conditions have also left many workers feeling they are not meeting their retirement savings goals, according to a recent Bankrate survey.

Fifty-seven percent of Americans working full time or part time or who are temporarily unemployed say they are behind on their retirement savings. Nearly half (48 percent) are pessimistic that they will be able to meet their aims.

“Given the sharp divide among those who express confidence, or lack of it, that they’ll be able to retire comfortably, we see a continuing pattern in our country of the ‘haves’ and the ‘have nots,'” said Mark Hamrick, Bankrate’s senior economic analyst.

The group noted that a sizable percentage of Americans may also lack the resources to cover an emergency. Bankrate’s latest annual Emergency Savings report found that a quarter of adults do not have any emergency savings.

In May, the Fed published the results of its Survey of Household Economics and Decisionmaking. The study found that just 54 percent of U.S. adults have enough savings to cover three months of expenses if they lost their primary source of income.

But while a plethora of surveys routinely highlight struggling consumers, researchers at the JPMorgan Chase Institute said this past summer that 90 percent of U.S. households are able to cover a $400 emergency shock.