If the Fed Cuts Interest Rates in 2024, What Happens to My Savings Account APY?

The Federal Open Market Committee (FOMC) of the Federal Reserve Board (aka the Fed) is a group of bankers, lawyers, and economists who are some of the most powerful people in America, because they control the price of money. By raising or lowering interest rates, the Fed helps guide the course of the economy, with wide-ranging effects on how people spend, save, and invest.

During 2022-2023, the Fed raised interest rates several times to fight high inflation, from near-zero to over 5%. As of December 2023, the effective federal funds rate is 5.25%-5.50%. This rate helps determine important aspects of your everyday financial life, such as the cost of home mortgages and auto loans, the interest rates on credit cards and personal loans, and the annual percentage yield (APY) on your savings account.

But in recent months, there have been positive signs in the battle against inflation. Consumer prices have been slowing, and as a result, the Fed indicated at its December 2023 meeting that it's likely to cut interest rates in 2024. Wall Street experts generally believe that interest rates might decline in 2024 by around 150 basis points (that's Wall Street-speak for 1.5 percentage points).

No one knows for sure if the Fed will cut interest rates in 2024, or by how much. But in case interest rates decline, here's what it means for your savings account APY -- and what you can do about it.

Lower interest rates = (probably) lower savings account APYs

The best savings account APY rates tend to track pretty closely with the federal effective funds rate. If interest rates go down next year, savings account APYs will also probably go down by a similar percentage. For example, let's imagine that by the end of 2024, interest rates have declined by 1.5 percentage points to a range of 3.75%-4.00%. This would mean that the best high-yield savings accounts (which are currently paying 5.30% APY as of December 2023) might offer only 3.80% APY by December 2024.

Keep in mind that not all banks pay the same APYs on savings. The national average savings account APY, as of December 2023, is only 0.46% according to the FDIC. Just because the Fed has kept interest rates at over 5% doesn't mean that every bank has to pay those rates on its savings accounts or certificates of deposit (CDs). Bigger banks often pay lower interest rates on savings accounts, while some of the best savings account APYs can be found at online banks and smaller community banks that are more eager to compete for your deposits.

So if the Fed cuts interest rates in 2024, your savings account is likely to become a little less profitable. Let's look at what you should do instead.

What to do if your savings account APY goes down

First, if you notice a drop in your APY, don't panic. This is normal, and everyone else in the banking system is going through it. Your savings account APY is not fixed; it can fluctuate as the Fed changes interest rates (or if your bank decides to start offering a different APY).

Here are a few personal finance situations where you might need to worry about a drop in your savings account APY -- and what to do next:

• Not enough emergency savings: Do you already have three to six months' worth of basic expenses in an emergency savings fund? If not, ignore the APY, and just keep saving. Keep putting more cash into your savings account until you have a bigger safety net. Even if your emergency savings aren't earning much interest, you need that cash to be safe in an FDIC-insured account, and easy to access in case of unexpected expenses or lost income.
• Saving for short-term goals: Are you using your savings account to save for a near-term purchase, like buying a new car or making a down payment on a house? If you want a higher APY that will stay the same as interest rates decline, you might want to consider moving the money into a CD. The best CDs sometimes offer fixed APY rates that are higher than a bank savings account -- but make sure the CD term (such as one year, two years, etc.) is the right level of commitment to fit your goals and timeline.
• Too much money in cash: This is a good problem to have, but some people have too much money sitting in cash. If you already have an ample emergency fund, and you have extra money in a savings account or money market account, you could be missing out on opportunities to earn higher yields in the stock market. A drop in interest rates could give you the motivation to make that money work harder. Investing in stocks and bonds, and putting extra cash into tax-advantaged retirement accounts like a traditional IRA or Roth IRA, could help you earn a bigger return on your money.

Bottom line: No one knows what the future holds. The economy could change in ways that make the Fed want to hold interest rates steady, or even raise interest rates again. But if inflation continues on its downward path, the general consensus on Wall Street is that we're in for a few rate cuts in 2024. If that happens, your savings account APY is likely to go down. But you still have options for how to make the most of your money.