Of all the big stories in today’s banking news, it’s what isn’t happening that people are talking about the most: the U.S. Federal Reserve not cutting interest rates. Back in March, the nation’s central bank was clinging to their planned series of three rate cuts, gradually stepping down from their benchmark lending rate of 5.25%. Then three cuts became one, and we’re still waiting for that move as we go to press.
It could happen when the Fed meets on September 18. People carrying debt, which is most of us, are anxiously awaiting this moment; in the meantime, some investors have taken advantage of higher interest rates to lock in low-risk savings accounts with rates as high as 6.17% Annual Percentage Yield (APY).
Will these rates go down when the Fed finally acts? Almost certainly – if they act at all. But let’s take a closer look before betting on it at any top-rated sportsbook.
What’s Taking the Fed So Long?
Inflation and jobs. The Federal Reserve started cranking up their interest rates in March 2022 to combat the inflation that came from all that COVID-19 relief getting poured into the U.S. economy. In a series of 11 steps, the benchmark lending rate rose from 0.5% to 5.5% by this time last year.
These changes were successful for the most part. However, just when it looks like the Fed is about to ease off the gas, a new report comes out that gives them pause. First, it was the news back in January and February that inflation was still flaring, thanks to high housing and gas prices. Now it’s the weaker-than-expected employment report from earlier this month.
Ironically enough, the Fed was waiting for the job market to cool off somewhat before slashing rates – but they may have waited too long. Higher rates make it harder for businesses to borrow money; leave these brakes on long enough, and the economy could slow down to the point where unemployment skyrockets.
They’d better act soon, in other words. But the Fed says they want to look more closely at the data as it comes in and make sure inflation is indeed under control. “I can imagine a scenario in which there would be everywhere from zero cuts to several cuts,” Fed chair Jerome H. Powell said earlier this month at a news conference.
Will My Savings Rate Go Down?
Probably. We’re in a rare situation where you can get a savings account with an interest rate that beats the inflation rate, which sank from around 6% to 3% after the Fed intervened. The banks could respond now by lowering their savings interest, but since the Fed has yet to do the same, they’re keeping their rates competitive with other banks instead.
Because the answer to our question depends so much on the Fed, let’s go directly to CME Group FedWatch, which at press time suggests it’s roughly a coin flip whether the “target rate” (currently 5.25-5.5%) will be 4.75-5% or 5-5.25% on September 18. That smaller rate is slightly favored at 50.5% probability.
The good news is that it’s highly unlikely the Fed will do nothing. FedWatch has the chance of rates remaining the same at zero; however, just a week ago there was an 85% chance the Fed was going to adopt the 4.75-5% target. That jobs report really seems to have people spooked.
However deep these cuts get – assuming they happen at all – expect your bank to respond with commensurate cuts to your savings interest rate. Some banks will respond more quickly than others, especially when it comes to accounts at or around that top rate of 6.17% APY. These high yields are typically available online only; bricks-and-mortar banks might take longer to move off their lower rates.
While everyone waits for that shoe to drop, you can still get some benefit from a high-yield savings account, but remember: these accounts have variable interest rates, not fixed. The party has to end sometime.
