Will the Interest Rate on High-Yield Savings Accounts Remain Sky-High in 2024?

Whether the interest rates on high-yield savings accounts remain elevated in 2024 depends entirely on what happens to the federal funds rate. While we can't predict the future with 100% certainty, we can look back at history to determine what happened before interest rates dropped. When you notice a shift in the economy and certain signs start to occur, it's safe to assume that rates across the board are about to decrease -- including the APY (annual percentage yield) paid on high-yield savings accounts.

How rates are determined

Interest is the amount you pay to borrow money, but it's also the amount you're paid when you keep money in a high-yield savings account. Interest rates rise and fall. It's as natural as birds flying south for the winter.

It all begins with understanding why the Federal Reserve does what it does. The Federal Reserve Bank, or Fed, is the U.S.'s central banking system. The Fed manages the nation's money supply and regulates financial markets. One way it controls the money supply is by adjusting interest rates. Here's how that might look:

• Imagine that unemployment is low and people have money to spend. Because so many potential buyers have cash or credit cards in hand and are ready to buy, inflation begins to rise.
• The Fed sees that inflation has become an issue and steps in by adjusting the federal funds rate. This is the interest one bank charges another bank for an overnight loan. Legally, all banks must keep a certain amount of money in reserve. When a bank nears the end of the day and realizes it doesn't have enough money in reserve, it borrows the funds it needs from another bank and pays that bank the federal funds rate.
• Let's say the federal funds rate is 1%. When a consumer applies for a loan, the bank uses that 1% as its base and tacks on the interest it wants to earn. For example, a bank may decide to make 3% on the loan, so the interest rate it offers borrowers is 4%.
• Inflation doesn't drop as quickly as the Fed hoped it would, and unemployment remains low. In response, the Fed ratchets up the federal funds rate more. Its goal is to cool down the economy and bring inflation to a manageable level.
• Once inflation drops to an acceptable level and consumers are less interested in spending and more interested in socking their money away in savings, the Fed lowers the rate to spur spending.

You can bet the Fed is about to lower rates when the following three signs appear.

Sign No. 1: Inflation continues to cool

Thanks to the pandemic, the inflation rate in the U.S. hit a whopping 9.1% in June 2022. That's the highest since Jimmy Carter sat in the Oval Office. As of the end of October 2023, the rate is down to 3.2%, a vast improvement. However, the Fed has clarified that it wants inflation at a level of 2%.

Once inflation nears the 2% mark, you can expect the Fed to consider reducing the federal funds rate. Once the Fed reduces its rate, expect the interest paid on deposit accounts like high-yield savings accounts, certificates of deposit (CDs), and money market accounts (MMAs) to come down.

Sign No. 2: There's a rise in unemployment

As stressful as unemployment is for individuals and their families, it has a natural cooling effect on the economy. Americans are less able or willing to part with their money, leading to an economic slowdown that worries the Federal Reserve. To encourage people to borrow money and get out there and spend, the Fed lowers the interest rate.

Again, when that rate comes down, you can expect rates on high-yield savings accounts to follow.

Sign No. 3: Less buying, more saving

Anxiety is contagious. Hearing about layoffs and a stalled economy makes the average person think twice before paying $20 for a mixed drink or $500,000 for a house that would have sold for $250,000 in 2019.

When it becomes clear that the economy is in a state of chill, Americans tend to pull back on spending and increase the amount of money they put into their emergency savings accounts and other safe financial vehicles.

The Fed steps in to lower rates, since the economy is no longer chugging along.

Although these three symptoms of a cooling economy nearly always lead to lower rates, there's no reason to miss out on today's smoking-hot APYs. Here are three banks currently knocking it out of the park.

Understanding how interest rates are set can be of comfort, especially when APYs on deposit accounts drop. That's because we know, eventually, rates will rise again.