Impact of a Potential Federal Reserve Rate Reduction on Your High-Interest Savings Account
The Federal Reserve is set to announce a cut in borrowing rates later today, a move that is expected to have a direct impact on savings rates.
Currently, some online banks offer Tagesgeld (overnight money) interest rates around 3% or slightly above, which may still be above or near the future expected Federal Reserve rate after rate cuts. For example, TF Bank offers 3.0% or more, while other banks like Bank of Scotland offer around 2.6%, and Consorsbank offers about 2.8% for 3 months. Most other offers range between roughly 1.7% and 2.3%.
When the Fed cuts its borrowing rate, banks often cut deposit rates proportionally. This means that most savers can expect their interest earnings to shrink alongside Fed rate cuts. However, it's important to note that the annual percentage yield (APY) on high-yield savings accounts (HYSAs) typically goes down in line with the federal funds rate.
Despite the anticipated rate cuts, high-yield savings accounts (HYSAs) remain a smart choice for stability, accessibility, and better APY, even if the rates start to decline. Smaller banks may maintain a higher APY for longer before trimming takes place on HYSAs. Online HYSA providers can afford to offer savers better rates than traditional banks due to lower overhead costs.
It's crucial to manage expectations moving forward and compare online savings products regularly to stay nimble. If you're seeking a new CD deal after the Fed has already lowered its borrowing rate, don't expect sky-high APYs. The APY on Certificate of Deposit (CD) accounts is fixed for the duration of the savings term, making them unaffected by changes in the Fed's borrowing rates.
Before the imminent rate reduction, most high-yield accounts were offering an APY of between 3.5% and 4.5%. A quarter point drop in the rate could result in a similar drop in the APY on an existing HYSA. However, a lower HYSA rate is still better than the APY you're getting elsewhere on variable savings accounts.
It's also worth noting that inflation still matters, even with a lower savings rate. The rate will remain above the inflation rate, meaning money is still growing in real terms, although not as fast.
Your FDIC protection and the accessibility of your money remain unchanged, regardless of shifts in the Fed's borrowing rates. High-yield savings accounts continue to be one of the smartest ways to protect your cash and generate interest, even with declining interest levels.
The author, Nash Riggins, did not have positions in any of the securities mentioned in the article.
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