This Is Why Your Savings Account Interest Rate Is Changing

Hey, wait a minute. You've been swindled! It says so right there, in big, bold letters: "We have emailed you to let you know we've cut your savings account rate by 0.25%. Peace, love, please don't leave our business, bye." What's that about? Feels like you've been hacked.

Believe it or not, banks change savings rates all the time. Unlike certificates of deposit (CD) rates, savings account rates are variable. Banks are ultimately responsible for rates -- some are just plain better than others -- but mostly, banks change rates for the same reasons.

The biggest reason banks change interest rates is Federal Reserve action, followed by profitability and competition. Read on to dig deeper into why your bank is tweaking your rates. Bad policy aside, there's probably a method to its madness.

The Federal Reserve is hacking your rates

The Federal Reserve is the U.S. government entity responsible for keeping inflation reasonable. It does that by raising or lowering interest rates, which it can do and has been doing for quite some time. After the COVID-19 pandemic, the Fed cranked up rates faster than ever before, from 0.25% in March 2022 to 5.5% in July 2023.

The bad news: Your loans got more expensive. The good news: Savings accounts got way more profitable. Banks have been raising savings account interest rates for some time. According to the FDIC, the average savings account rate has risen 700% from March 2022 to today.

Talk about a big move! To cap it all off, the Federal Reserve has led many people to believe it'll begin lowering rates later this year, prompting some banks to send those pesky rate-drop emails to customers. Phooey. The good times can't last forever, it seems.

Feel like locking in a good interest rate? Consider opening up a CD. It'll lock in your interest rate, most often for six months to five years. The catch is, you can't withdraw your money early without paying an early withdrawal penalty (a fate best avoided).

Profitability and competition

Though the Federal Reserve has massive influence over interest rates -- including the interest rate on your savings account – banks still have a lot of leeway over how much interest they offer. The highest-yielding bank accounts offer more than 10 times what competitors do.

Why do some banks offer higher rates? Profitability is a big part of it. The cheaper it is to operate a bank, the better rates it can offer. Online banks typically have the advantage. They're cheaper to operate than brick-and-mortar alternatives are.

Another factor is competition. When you're losing customers to rivals with better savings account rates, you're more likely to bite the bullet and keep rates high. Again, online banks seem to be winning these battles more often than not.

If my bank cuts my rates, should I switch banks?

Not necessarily. There are good reasons to stick with banks that offer low interest rates.

Big legacy banks have attracted plenty of customers in recent years, leaning on stellar safety records. Sometimes, it's worth settling for a lower savings account interest rate in exchange for peace of mind. It just so happens, the safest banks are often (but not always) the largest.

That said, you can totally switch banks. Low interest rates, poor customer service, and a lack of features are all good reasons to switch. Keep in mind, there isn't a bank on the planet that can 100% guarantee that your rate won't change in 2024; treat such claims with caution.

What will happen to interest rates in 2024?

Excellent question, couldn't have phrased it better myself. The short answer is, it's up to your bank. Banks are ultimately responsible for setting their own rates.

The long answer is, rates will probably fall. The Federal Reserve has paused rate hikes, and it's signaled it will lower interest rates later this year. It might not happen, but it's likely. If the Federal Reserve does lower rates, many banks will follow suit. That will shrink the interest rates offered for their savings accounts.

So the next time you find an email titled, "We lowered your rates, now live with it," feel free to tell the email you know why it's there, and you're only a teensy bit mad about it.