Rates on savings accounts and certificates of deposit remain higher than they’ve been for most of the past decade. But what exactly impacts the interest rate of your bank account?
Let’s break down a few factors.
A high Fed rate keeps savings rates up
From March 2022 to July 2023, the Federal Reserve steadily increased its federal funds rate, or Fed rate, from nearly zero to around 5%. The 11 rate increases were the Fed’s attempt at curbing high inflation, which has dropped significantly since that March. The Fed rate itself is the one U.S. banks use to borrow money overnight between each other, and a higher rate also means higher borrowing costs.
Banks and credit unions, in turn, take their cue from Fed rate increases to raise their rates on certain loans, savings accounts and certificates of deposit. Banks often fund new loans and investments using deposits, or the money in customers’ bank accounts. Higher savings rates help attract more customers. From March 2022 to May 2024, national average rates rose from 0.06% to 0.45% for savings accounts and 0.15% to 1.80% for one-year CDs, based on a NerdWallet analysis.
In 2024, the economy has improved in terms of inflation and unemployment, and the Fed hasn’t seen the need to lower its rate. The last change to the Fed rate was in July 2023, so the high Fed rate has kept yields for savings accounts and CDs high.
Mike Schenk, chief economist at the association America’s Credit Unions, describes depository institutions being caught in a delicate balance: accepting high funding costs by having high deposit rates while also trying not to lose customers by having lower rates than their competitors.
Online banks compete with higher rates
National average rates don’t tell the full story, though. If you’re an avid saver, you’re probably familiar with high-yield savings accounts and high-yield CDs. These accounts often have rates several times the national average and are mostly available at online banks and online credit unions. These branchless institutions don’t have the overhead costs of brick-and-mortar banks, so they can provide — and compete for — customers with higher rates.
In June 2022, high-yield savings rates at some online banks were around 1% to 1.25% annual percentage yield, and competitive one-year CD rates were hovering around 1.50% to 2% APY, based on NerdWallet data. In June 2024, top savings rates are around 5% APY while some one-year CD rates remain above 5% APY.
To take advantage of rates, compare high-yield savings accounts as a potential place for emergency savings or other short-term money goals. Rates are variable so they can change, but adding regular contributions will boost your savings and help you see the effects of compound interest over time. If you have a portion of savings that can stay untouched for months to years, high-yield CDs can offer competitive, fixed rates that also utilize compound interest.
Other factors that affect rates
The type of bank account matters
Generally speaking, CDs can have the highest yields followed by savings accounts and money market deposit accounts, especially when comparing rates at the same institution.
CDs lock up funds for a fixed term, while savings and money market accounts allow for ongoing access, though they can have a monthly limit on certain withdrawals. The type of account with the most access to funds — a checking account — typically earns minimal, if any, interest. The national average for interest checking has barely budged in the past decade, based on NerdWallet analysis.
Consumers may look beyond banks for higher returns
Banks have an incentive to keep interest rates on various savings accounts low to save on costs, said Daniel Talley, professor of economics and statistics at Dakota State University, in a 2023 interview. But banks also have to be competitive with other opportunities that savers have.
Money market mutual funds are a good example of getting high returns that are relatively safe and accessible as far as investments go, Talley said, though they’re not federally insured like bank accounts are. Money market funds consist of short-term, high-quality investments such as U.S. Treasurys.
Money market funds are an example of an attractive nonbank option for depositors, according to New York Fed researchers. They note that consumers may opt to take more money out of banks, which pressures banks to raise their rates to keep those consumers.
“Credit unions such as ours and banks, we’re at the mercy of two things,” says Robert Frick, corporate economist at Navy Federal Credit Union. “One, the current rate environment, which mirrors roughly Treasuries and that’s what we base a lot of our rates on. And then it’s competitions. If you can offer higher rates to your members and still make a little bit of money, you’re going to do it.”
Economic forecasts can play a role
The only type of bank account with fixed rates is a CD, and typically the longer a CD term, the higher the rate. You ideally get a bigger reward for keeping funds inaccessible for longer. However, since the first half of 2023, CD rates — both national average and high-yield rates — have maintained an inverted yield curve, a phenomenon that originated with bonds such as Treasurys, in which long-term interest rates are lower than short-term interest rates. This type of yield curve can reflect banks’ beliefs that interest rates are headed downward, so they’re adjusting CD rates accordingly.
“Traditionally people say that if the yield curve is inverted, that means a recession. Well, typically that’s true, but we’re still not in a typical economic environment,” Frick says. “We still have essentially COVID-induced inflation to deal with, and we have an economy which is doing well, so it’s very unusual.”
A high rate environment tends to be good news for saving money in bank accounts, but remember that other factors can determine the rate you get.
