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With multiple Federal Reserve rate cuts expected this year and into 2025, yields on many deposit accounts have been decreasing slightly. However, when it comes to annual percentage yields (APYs) beating inflation, savers will likely continue to win out, at least for the near term.
These days, rates on high-yield savings accounts are outpacing the rate of inflation:
- Top APY on a high-yield savings account: 5.30%
- Current inflation rate: 2.5%
For savers earning such a rate, not only is there peace of mind from having cash on hand for emergencies or other savings goals, but also, their money isn’t losing purchasing power in such an account.
Here we’ll delve into the ways high inflation has impacted savings account rates, as well as how you can ensure you’re reaping the benefits of a high APY.
Inflation’s ripple effect on savings account rates
From 2022 to 2023, in an effort to bring down soaring inflation, the Federal Reserve gradually hiked its benchmark federal funds rate from a range of 0-0.25 percent to a 23-year high of 5.25-5.50 percent. Banks and credit unions tend to move in lockstep with the federal funds rate, so many financial institutions increased their APYs, in turn.
Over time, inflation has decreased from a high of 9.1 percent in June 2022 to 2.5 percent in August 2024 — and it’s nearing the Fed’s target rate of 2 percent. Meanwhile, rates on high-yield savings accounts currently remain high.
Currently, the difference between the highest-yielding savings accounts and the rate of inflation is nearly 3 percent. Even if savings account yields decrease as a result of the Fed cutting rates, chances are you’ll still be able to earn a rate that beats inflation.
Why it pays to shop around for a high APY
When it comes to APY, not all savings accounts are created alike. While many banks offer 5 percent APY or greater, the national average savings account rate is only 0.61 percent APY. What’s more, various large brick-and-mortar banks only pay a minuscule 0.01 percent APY on savings accounts.
The difference between earning a high yield and a low one can be staggering. For example, $10,000 that earns 5 percent APY would earn around $500 in interest per year, compared with $1 in interest from $10,000 in an account that earns 0.01 percent APY. (Note that most savings accounts earn a variable APY, meaning banks can raise or lower it at any time.)
Yet two-thirds of savers still earn a lackluster savings account rate of less than 4 percent, Bankrate’s Online Savings Survey found in April 2024.
Where to find the best high-yield savings account
Ultimately, the best rates on deposit accounts can be found at online-only banks. Some online banks offer higher APYs as a way to draw in customers from established brick-and-mortar banks, which often pay lower rates.
Credit unions are another common source of high APYs. Because they’re not-for-profit organizations, profits may be distributed among members by way of high yields on savings accounts.
In addition to APY, pay attention to factors such as minimum deposit requirements when shopping around for the best savings account. It’s also important to find an account with federal deposit insurance, as well as one that doesn’t charge monthly service fees.
CDs as an alternative to savings accounts
Certificates of deposit (CDs) can be another source of high rates from your bank or credit union. While Fed rate cuts could trigger banks to lower their APYs, opening a fixed-rate CD guarantees you’ll earn the same rate throughout the CD’s entire term — even if your bank lowers the yields on new CDs it issues.
In exchange for the guaranteed rate, however, the bank wants to hold onto your money for the duration of your CD’s term. As such, withdrawing the money before the CD matures will likely result in an early withdrawal penalty. This can eat into your interest and possibly even your balance.
Before dedicating money to a CD, make sure you won’t need the funds before the CD matures. Also, make sure you have money set aside for emergencies in a liquid savings account.
Bottom line
APYs on various savings accounts and CDs have been outpacing the rate of inflation since March 2023. As such, it’s a good time for savers, as long as the money is in a high-yielding account. Ultimately, the right savings account for you offers a high APY and a minimum deposit requirement you’re comfortable with, without charging service fees that would eat into your balance.
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