How the Fed Affected Your Savings Account in ’23 and What’s Next

In a year that saw the federal funds rate reach its highest level in more than two decades, high-yield savings accounts are earning some of the best rates we’ve seen in a while. This means savvy savers are ending 2023 on a high note.

But the Fed has recently hit pause on rate increases. The target range has remained between 5.25% and 5.50% since July. The many savings account rate hikes we saw earlier in the year have leveled off accordingly.

So where will savings rates go in 2024?

Before making predictions, it’s worth taking a moment to understand what the Fed rate is, why it sometimes changes, and what effect those changes have on your savings account. Once you understand that, you can take steps to maximize your own bank moves, regardless of what the Fed announces.

A look back: The Fed rate and how it affects you

The federal funds rate is the interest rate that banks charge each other to borrow money to meet regulatory requirements. The Fed can use rate increases (and decreases) to respond to market conditions.

Raising the rate can help curb inflation by making it more expensive for banks to borrow money. This can increase the cost of loans to consumers and businesses. When loans are more expensive, some households may be less willing to spend money, which could eventually lead to lower prices and lower inflation. Fed rates increased four times between February 2023 and July 2023, following seven consecutive increases in 2022.

Rising Fed rates are good news for savers, as hikes tend to correspond with savings rate increases. In January 2023, the average national savings account rate was 0.33%, according to the Federal Deposit Insurance Corp. By November 2023, that figure had bumped up to 0.46%. (Both rates are significantly higher than the average of 0.06% in January 2022, before the series of rate hikes.) These increases, while notable, are just averages. The best savings rates have risen from less than 1% in January 2022 to an annual percentage yield of more than 5% today. Here’s what a high rate means. Say you put $5,000 in your emergency savings fund and it earns 0.06% APY. If you left that amount in your account without touching it for a year, your bank balance would grow by only about $3. But put the same amount in a savings account that earns 5% APY and it would grow by more than $250 in the same period. That’s extra money without extra effort. You can use a savings calculator to tally more potential gains.

It’s worth noting that not everyone can leave money untouched in savings for a year. According to J.D. Power’s October 2023 Banking and Payments Intelligence report, more than a quarter of American bank customers surveyed reported tapping their emergency savings account in the previous 90 days to pay for regular expenses, such as gas, food or rent.

Rising costs due to inflation were a big reason customers drew down their savings over the past year, says Jennifer White, a senior consultant in the banking and payments intelligence practice at J. D. Power and author of the study. The cost of goods and services can affect customers’ ability to save.

But relief may be on the horizon.

What to expect in 2024

Today, the core inflation rate is lower than it was in 2022 when Fed rate increases began. Forecasters are predicting that going into next year, inflation will continue to fall or moderate.

The economic indicators now “seem to be moving in a positive direction,” White says.

Lower inflation can mean lower prices for consumers, and it could also mean no more Fed rate increases for a while. The CME FedWatch tool, which aggregates analyst predictions for Fed rate changes, shows a high probability that the Fed rate will decrease at some point in 2024, potentially as early as March. Keep in mind that this is just an estimate.

If the Fed rate does decrease, we will likely see a drop in the top savings account yields. But remember that the savings account increases we saw earlier this year didn’t happen overnight, and sudden steep slides aren’t likely to happen either. If rates do decrease, your savings may not earn interest as fast as before. But having your money in a high-rate account still gives you the best chance to make the most of your funds. High-interest savings accounts tend to outperform their competitors even when rates drop. Back in January 2022, when the average savings account rate was a pitifully low 0.06%, high-yield savings accounts still earned around 0.50% APY — nearly 10 times more than the average at the time.

“If you are not taking whatever amount of money you have and taking a look at those high-yield options, you may be leaving money on the table,” White says.

Getting your savings ready for 2024

You can’t control the Fed, but you can control your own money moves. Here are some ways to put yourself in a strong financial position, no matter what happens with savings rates.

• Review your savings plan to build your balance and prepare for unexpected expenses.

• Bank confidently with a federally insured high-yield savings account. 

• Avoid monthly fees on bank accounts.

• Consider locking in high rates today with a certificate of deposit.