Savings rates are dropping because the Federal Reserve is lowering its benchmark interest rate
Yes, savings account interest rates are going down. The Federal Reserve has been cutting its benchmark rate since mid-2023, and banks have followed by lowering the rates they pay on savings accounts, money market accounts, and certificates of deposit. When the Fed's rate falls, banks earn less on the money they hold, so they pass that decline to depositors by paying less interest on deposits.
The timing and size of rate cuts vary by bank. Some large national banks cut rates within days of a Fed announcement; others wait weeks. Online banks, which have higher rates to begin with because they have lower overhead, sometimes hold their rates steady longer before dropping them. A rate that was 4.50% in January might be 4.25% by March at the same institution.
This is different from a rate increase cycle. When the Fed was raising rates from 2022 through 2023, savings rates climbed steadily, and savers benefited. Now the direction has reversed, and the benefit is shrinking.
Key Takeaways
- Savings rates fall when the Federal Reserve lowers its benchmark rate, because banks reduce what they pay depositors.
- Online banks typically offer higher rates than brick-and-mortar banks, but those rates are also falling as the Fed cuts.
- Money market accounts and certificates of deposit follow the same downward trend as savings accounts.
- Locking in a rate through a CD now protects you from further cuts during the CD term, but rates on new CDs will be lower than rates on older ones.
- The Fed's rate-cutting cycle does not have a set end date; future cuts depend on inflation and employment data.
How the Fed's rate cuts flow to your savings account
The Federal Reserve does not set savings account rates directly. Instead, it sets the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed lowers this rate, banks have less incentive to offer high rates on savings accounts because they earn less on their own investments and lending.
Banks use deposit rates as a tool to attract or shed customers. When rates are falling, banks cut rates to reduce the cost of holding deposits. When rates are rising, banks raise rates to compete for deposits. The lag between a Fed move and a bank's response can be days or weeks, and different banks move at different speeds.
Online banks have been hit harder by rate cuts than traditional banks because they built their customer base on offering rates 10 to 15 times higher than the national average. As rates fall, that advantage shrinks. A rate of 5.35% becomes 4.50%, then 4.25%. The gap between online and traditional banks narrows, so the reason to switch banks weakens.
What rates look like now compared to a year ago
Savings account rates peaked in late 2023 and early 2024. At that time, top-tier online banks offered rates between 5.25% and 5.50%. National banks like Chase and Bank of America offered rates between 0.01% and 0.05%. That gap was enormous.
As of now, rates have fallen across the board. Top online banks are offering rates in the 4.00% to 4.50% range. National banks remain near 0.01% to 0.05%. The gap still exists, but the absolute dollars earned on a deposit have shrunk. On a $10,000 deposit, the difference between a 5.35% rate and a 4.25% rate is about $110 per year in lost interest.
The exact rates available to you depend on which banks you check and when you check them. Rates change weekly or even daily at some institutions. The only way to know the current rate at your bank is to log in or call and ask.
Certificates of deposit lock in a rate, but new CDs pay less
A certificate of deposit (CD) is a savings product where you agree to leave money untouched for a set period—usually three months to five years—in exchange for a fixed interest rate. The rate you receive on the day you open the CD is the rate you earn for the entire term, regardless of what happens to market rates.
If you opened a one-year CD at 5.35% in early 2024, you will earn that rate through the maturity date, even if rates fall to 3.50% by next year. That locks in your gain. However, if you are opening a new CD now, the rate offered will be lower than what was available six months ago. A one-year CD might now pay 4.25% instead of 5.35%.
The trade-off is simple: a CD protects you from further rate cuts, but you cannot access the money without paying an early withdrawal penalty. That penalty varies by bank and CD term, but it often equals three to six months of interest. If you withdraw early from a one-year CD paying 4.25%, you might lose $85 to $170 in interest.
Money market accounts and high-yield savings accounts are falling together
Money market accounts and high-yield savings accounts (HYSAs) both track the Fed's rate cuts closely because both are tied to short-term market rates. The difference between them is small: money market accounts often come with a debit card and limited check-writing, while HYSAs are pure savings vehicles. Both offer rates that change frequently.
When rates fall, both products fall at roughly the same pace. An HYSA at 4.50% will drop to 4.25%, then to 4.00%, in step with the Fed's cuts. A money market account at the same bank will follow the same path. Neither offers the protection of a fixed rate that a CD provides.
The advantage of these accounts over a regular savings account is that they pay significantly more interest. The disadvantage is that the rate is not may provide and can drop without notice. Banks are required to notify you of rate changes, but they can make those changes whenever they choose.
When the Fed might stop cutting rates
The Federal Reserve does not announce a schedule for rate cuts. Each decision depends on two main factors: inflation and the job market. If inflation stays above the Fed's 2% target, the Fed may pause or reverse course and start raising rates again. If unemployment rises sharply, the Fed may cut faster to support the economy.
Rate cuts typically continue until inflation is under control or the economy weakens enough to warrant stimulus. That could mean cuts continue for several more months, or it could mean they stop soon. There is no way to predict the exact timeline.
What matters for your savings is that rates will not return to 5.35% unless the Fed raises rates again, which would take a significant shift in economic conditions. Plan on rates staying in the 3.50% to 4.50% range for the near term, with the possibility of falling further if the Fed cuts more aggressively.
Strategies when rates are falling
If you have cash you will not need for a year or more, locking in a rate through a CD now protects you from further cuts. A one-year or two-year CD at 4.25% is better than watching rates fall to 3.50% and earning that lower rate on a savings account. The trade-off is that your money is locked up, so only use this strategy for money you truly do not need to access.
If you need flexibility, keep money in a high-yield savings account or money market account. The rate will fall, but you can move the money if a better rate appears elsewhere, or withdraw it without penalty if you need it. The interest earned will be lower than a CD, but you avoid the early withdrawal penalty risk.
For very short-term money—cash you will need in the next three months—a three-month CD might make sense if the rate is meaningfully higher than a savings account. However, rates on short-term CDs are often only slightly higher than savings rates, so the benefit is small.
Do not chase rates by moving money frequently between banks. The difference between a 4.50% rate and a 4.25% rate on a $5,000 deposit is about $12.50 per year. The time and effort to switch banks is not worth that gain.
Frequently Asked Questions
Will savings rates ever go back up to 5% or higher?
Only if the Federal Reserve raises its benchmark rate again. That would require inflation to spike or some other economic shock. For now, the Fed is cutting rates, so the direction is down. Rates could stabilize in the 3.50% to 4.50% range and stay there for months or years.
Should I move my money to a different bank if my current bank cuts rates?
Only if the rate difference is large enough to justify the effort. If your bank drops from 4.50% to 4.00% and another bank offers 4.35%, the difference on a $10,000 deposit is $50 per year. Whether that is worth switching depends on how much money you have and how much hassle the switch causes you.
What happens to my CD if rates fall while I own it?
Nothing. Your CD rate is locked in for the full term. You earn the same rate whether market rates fall to 2% or rise to 6%. The only risk is if you need the money before the CD matures and have to pay an early withdrawal penalty.
Are banks required to tell me when they lower my savings rate?
Yes. Banks must notify you of rate changes, usually by email or through your online account. However, they can make changes whenever they choose, and the notice period varies. Some banks give you a few days; others give you a week.
Is there a savings product that protects me from falling rates?
A CD is the only product that locks in a rate for the full term. Everything else—savings accounts, money market accounts, HYSAs—has a variable rate that can fall at any time. If you want certainty, a CD is your only option, but you sacrifice access to the money.