Interest rates are dropping. What does this mean for you?

High-interest savings accounts were all the rage at the beginning of the year. Now their rates are falling, in response to the Federal Reserve cutting interest rates.

On Oct. 30, the Fed cut its benchmark interest rates for the third time this year, in an attempt to stimulate a slowing economy. While these rate cuts help consumers borrow money, most high-interest savings accounts will suffer.

What are high-interest savings accounts?

High-interest savings accounts pay a higher interest rate on deposits than a traditional savings account. Online banks are more capable of offering high-interest savings accounts because they don’t have to pay the costs associated with running a brick-and-mortar bank.

The average national annual percentage yield on traditional savings accounts is 0.09%, according to the Federal Deposit Insurance Corp. At the beginning of the year, many high-yield savings accounts had APYs over 2% — a big difference in return.

Now, that number has fallen. Popular online banks like Marcus and Ally currently have interest rates at 1.9% and 1.8%, respectively.

Why are these interest rates falling?

These interest rates have fallen in response to the Fed cuts.

“It’s normal to cut rates, because the Fed oversees the market and is trying to stimulate the economy,” said Mike Alves, certified financial planner and founder of Vida Private Wealth.

As a result, some online banks are scaling back their offerings on high-interest savings accounts and certificates of deposit to make up for lower interest rates on consumer loans.

“Rates have to go down,” said Alves. “If the overall market rate decreases, a bank can’t keep offering customers a 2% yield. It would eat into their profit.”

How the rate cut affects your wallet

The move is great for borrowers, but not for savers.

“(The Fed) wants business owners and savers to actually put their money to work instead of hoarding it,” Alves said.

The rate cut will lessen the consumer debt burden, especially credit card debt. Some credit cards initially come with a variable APR, meaning the rate changes are based on an interest rate index, often known as the prime rate. That rate is used for many types of consumer loans. So when the Fed cuts interest rates, the prime rate drops, too.

Mortgage rates are not directly linked to Federal rates, but can be influenced by the economy and inflation, which are tied to Federal rates. Mortgage rates have been steadily declining for a year.

This is good for spenders. But for savers, growing a nest egg just got more difficult.

“It’s unfortunate for savers, but it’s kind of the point,” said Alves. “You want to stimulate the economy and get people to spend, not save.”

There are unfortunately not many alternatives. Savers can consider locking in a higher rate with a certificate of deposit (learn how to ladder them here.) But that makes the money inaccessible until the CD has matured.

If you’re willing to take on risk, consider investing. We’ve got a beginner’s guide here.

Savings rates can adjust any time, so be on the lookout for changes. But anything that sounds too good to be true, probably is.

“Anything that clearly stands out from the rest, with significantly higher rates, I would be careful,” said Alves.

Image: H. Armstrong Roberts

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