How far will savings rates fall if the Fed cuts rates? Here's what experts say
In order to try to tame high inflation, the Federal Reserve went through a stretch from March 2022 through July 2023 where it quickly raised the federal funds rate, eventually landing at 5.25 to 5.50%, a 22-year high. This rate affects what banks charge one another for overnight lending, so a higher benchmark rate typically leads to higher rates on loans, such as mortgages. But the other side of that coin is that a higher benchmark rate also means higher interest rates on savings.
On average, regular savings accounts currently have an annual interest rate of about 0.47%. However, that's not the case for many high-yield savings accounts right now. These types of accounts tend to pay far more, with many offering annual percentage yields (APYs) around 5% currently, if not higher.
However, these high rates may start to come down relatively soon, as many experts predict the Fed will start cutting interest rates later this year. That, in turn, will likely impact what banks offer to savers. But how far will savings rates fall if the Fed cuts rates this year?
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How far will savings rates fall if the Fed cuts rates? Here's what experts say
Should the Fed make rate cuts this year, some possible savings rate scenarios include:
A 0.75% drop in rates in 2024
Although the Fed has held rates steady recently, which has contributed to banks continuing to offer high savings interest rates, that might not last for long.
"Based on my research and insights, it appears that many believe that starting in June — with the Fed meeting on June 12th — there will be the first of three rate cuts at approximately 25 basis points each," says Jeff Mandel, CEO of Credit and Debt.
"It is forecasted that this would cause a correlating reduction in savings rates up to 0.25% after each cut," he adds.
So if a high-yield savings account currently has a 5% APY, he says, that could mean savings rates would fall to 4.25% after the three expected Fed rate cuts in 2024.
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Some larger and some smaller cuts, depending on the bank
While many experts agree on the pace of the Fed's rate cuts, how that will affect banks isn't as straightforward. For example, some banks might maintain higher rates as a way to attract customers, even if the Fed starts cutting rates, while banks that aren't as eager for more deposits might feel more comfortable cutting rates.
"Banks that feel they are healthy in deposits may lower their rates at a faster rate, while those banks that want to try to maintain strong asset flow/deposits may be slower to lower their rates," says Brett Bernstein, CEO and co-founder at XML Financial Group.
Some might even offer temporary promotional rates with attractive APYs to bring in more deposits, he adds.
In other words, savings account rates might not move exactly in line with what the Fed does, as much of it depends on a bank's own strategy.
Potential for larger drops past 2024
After the initial expected Fed rate cuts, savings account rates could fall even more heading into 2025, some experts say.
"As many analysts predict, the Fed is likely to start cutting rates later in 2024 and continue in 2025. If we see an overall 1% decrease in rates, we can expect to see top savings rates fall by 1-2%, depending on the institution," says Aaron Cirksena, founder and CEO at MDRN Capital.
While the Fed might only cut the benchmark rate by around 0.75% this year, continued cuts in 2025 could bring savings account rates even lower. And, while top savings rates will likely still be above 4% and possibly over 4.25% by the end of 2024, the pace could pick up in 2025, says Mike Hunsberger, owner of Next Mission Financial Planning.
"I think it is likely that interest rates on savings accounts will continue to fall if the Federal Reserve is satisfied that they've got a handle on inflation and can continue to cut the fed funds Rate. I think the rates could approach 3-3.5% if inflation gets back to about 2%," Hunsberger says.
There's also the possibility that rates could fall based on broader economic conditions beyond inflation.
"Rates could also drop if the economy weakens significantly and the Federal Reserve lowers rates to try to spur near-term growth. How low they'd go in this instance would depend on how weak the economy is," says Hunsberger.
The bottom line
Many experts agree that savings account rates are likely to generally trend lower this year, with the top savings accounts dropping rates by around 75 basis points, e.g., falling from 5% to 4.25%. However, some banks might cut rates faster than others if they don't have as much of a need to attract deposits, while others might keep rates temporarily high to draw in customers.
The pace could pick up in 2025, experts say, with rates potentially falling into the 3% range for some of the best savings accounts. However, much depends on what happens with the economy.
