Attention savers: the days of high-interest savings accounts are coming to an end.
In March 2022, in response to inflation, the Federal Reserve began raising interest rates. The central bank raised rates 11 times, bringing them to 5.25% – 5.5%, the highest level in two decades.
Savers have been able to earn steady returns of 4% – 5% by keeping their money in low-risk investment tools such as high-interest savings accounts, certificates of deposit, money market funds, and government bonds.
Even billionaire Warren Buffett has invested a significant amount of cash in government bonds, with Berkshire Hathaway earning tens of millions of dollars in interest every month.
According to a survey by consumer financial services company Bankrate in October 2024, the national average account rate is 0.57%, compared to just 0.06% at the beginning of 2022.
However, as we head towards 2025, interest rates may decline.
After over four years of rate hikes, the Federal Reserve announced a rate cut in September, starting a new cycle of loose monetary policy, with the federal funds rate dropping by 50 basis points. The Fed’s economic projections indicate that the federal funds rate could fall to 3.4% by the end of next year and to 2.9% by 2026.
Even with planned rate cuts by the Fed, rates are still higher than pre-pandemic levels. In December 2019, the federal funds rate was at 1.55%.
Although the Fed has plans to cut rates, it is not yet clear how savings account rates at banks will change. Statistics show that the highest certificate of deposit rates have been lowered 53 times and raised 7 times.
Moreover, it remains uncertain whether low rates will prompt cash savers to switch to higher-yield investment options.
Justin Haywood, the CEO and co-founder of Haywood Wealth Management, stated that savings accounts are still suitable for families to build emergency funds or vacation savings.
“Even after the recent Fed rate cut, savings accounts are still attractive,” Haywood told The Epoch Times. “Although rates are lower than a few months ago, they can be accessed at any time and their safety remains suitable for short-term savings and emergency funds.”
According to data from NerdWallet, many financial institutions still offer higher annual rates.
EverBank, My Banking Direct, and Poppy Bank offer rates at 5%. In contrast, CIBC U.S., BMO Alto, Barclays, Citibank, and Marcus, a Goldman Sachs company, provide rates above 4%.
On the other hand, national banks like Bank of America, JPMorgan Chase, and Wells Fargo offer savings account rates as low as 0.01%. These big banks have little incentive to raise savings account rates because they already have significant deposits.
As of September, deposits at large commercial banks total nearly $11 trillion.
While consumers may not be leaving traditional institutions like JPMorgan Chase or Citibank in large numbers, they are taking advantage of high rates by placing excess cash into money market funds. These funds are mutual funds that invest in low-risk, short-term debt securities. Fed data shows that in the second quarter of this year, assets in these funds surged to a record-high of $6.547 trillion.
As we approach a new era of interest rates, it may be wise to reconsider your savings, investments, and the composition of your disposable cash investments.
“Savers should continue to place some funds in savings accounts or high-yield savings accounts for easy access and security,” Haywood said. “However, for funds not needed urgently, investing in certificates of deposit (CDs) or U.S. Treasury bonds may be more attractive as they offer fixed rates and lower risk.”
Following the Fed’s rate cut, government bond rates unexpectedly rose. The 10-year Treasury yield surpassed 4% for the first time since August.
Furthermore, for longer-term goals, individuals should consider diversified investment portfolios that include a mix of stocks and fixed-income products.
In August, the personal savings rate in the U.S. dropped to 4.8%, below the pre-pandemic levels of over 6%.
In recent years, various reports have highlighted the impact of inflation on household savings, with many people struggling to meet their financial goals.
In the spring, a survey by Allianz Life found that due to persistent inflation, over two-thirds (69%) of Americans did not increase their savings. 51% of respondents even accumulated more debt due to price pressures.
Kelly LaVigne, Vice President of Consumer Insights at Allianz Life, stated in a release, “The rise in the cost of living is squeezing American budgets. A slowdown in inflation does not mean a decrease in prices.”
Last month, the annual inflation rate slowed to a higher-than-expected 2.4%, reaching the lowest level in over three years. However, cumulative inflation has surged over 20%, leading to a 17% decrease in purchasing power for Americans since January 2021.
According to a recent survey by Bankrate, the current economic situation has left many feeling that their retirement savings goals are difficult to achieve.
57% of full-time, part-time, and temporarily unemployed Americans said they are not making good progress with their retirement savings. Nearly half (48%) are pessimistic about achieving their savings goals.
Mark Hamrick, Senior Economic Analyst at Bankrate, said, “There is a vast divide in people’s confidence in having a comfortable retirement, and we can see that the separation between ‘haves’ and ‘have-nots’ persists in our country.”
The institution pointed out that a significant portion of Americans may also lack emergency resources. Bankrate’s latest annual emergency savings report found that a quarter of adults have no emergency savings.
In May, the Federal Reserve released the results of the Survey of Household Economics and Decision-making, which found that only 54% of U.S. adults have savings sufficient to cover three months of expenses if they lose their primary source of income.
Despite frequent surveys highlighting consumers’ struggles, researchers at JPMorgan Chase Institute stated this summer that 90% of American households can afford a $400 emergency expense.