How high will savings rates go in 2024?

It’s been more than 18 months since the Federal Reserve began aggressively raising interest rates to rein in rampant inflation, causing Americans to live in a completely different world than before the pandemic. 

The good news for consumers is that the Fed’s efforts are working: The inflation rate has moderated substantially in 2023, while banks have raised yields on savings products.

But those efforts also come at a cost for borrowers, with the average interest rate on a 30-year fixed-rate mortgage jumped by almost five percentage points from late 2020 to October 2023. 

In this high interest rate environment, which may last well into next year (or beyond), it is key to reduce your borrowing and take advantage of savings opportunities. 

Saving rates outlook in 2024

Thanks to the Federal Reserve, there are now dozens of banks out there offering high-yield savings accounts and other accounts that pay upward of 5% interest to savers. However, these high-yield rates can disappear as quickly as they arrived if the Federal Reserve pivots from raising interest rates to cutting them.

The Federal Open Market Committee issued its most recent interest rate hike in July 2023, raising its fed funds target rate by 25 basis points between 5.25% and 5.50%. The fed funds rate is the interest rate depository institutions charge each other for overnight loans. 

While the Fed does not directly control interest rates on high-yield savings accounts, they are highly correlated to the fed funds rate. 

The higher the fed funds rate rises, the more income banks can potentially generate from depositors’ cash. Therefore, when the Fed raises interest rates, certain banks tend to raise the rates they pay depositors to compete for their cash.

Of course, many large banks choose to keep savings account rates low to maximize the amount of money they can make off customer deposits. For example, Bank of America still offers customers a whopping 0.03% standard interest rate for its rewards money market savings accounts, as of October 19. 

However, banks that offer competitive high-yield savings accounts have been adjusting the rates they pay on those accounts roughly in line with the Federal Reserve’s fed funds rate. The fed funds target is now at its highest level in 22 years. But it may not stay at the current level for much longer. 

The bond market is pricing in roughly a 25% chance the FOMC will raise interest rates by at least another 25 bps by late 2023, according to CME Group. However, investors are anticipating a pivot from rate hikes to rate cuts by mid-2024. The bond market is pricing in around a 70% chance of a rate cut by July 2024.

Factors that influence higher savings rates

The single biggest factor influencing U.S. savings rates is the Federal Reserve’s fed funds target rate, but the FOMC itself is influenced by several other economic factors.

For the past two years, the Fed has been laser-focused on one key issue — inflation. Part of the Fed’s long-term goal of price stability and maximum U.S. employment involves maintaining a modest 2% inflation. 

The Federal Reserve’s preferred inflation measure is the core personal consumption expenditures price index. Core PCE is a measure of the prices U.S. shoppers pay for goods and services, excluding volatile food and energy prices. 

Core PCE inflation surged as high as 5.30% in February 2022, kicking off the FOMC’s current cycle of interest rate hikes beginning in March 2022. As of September, annual core PCE inflation was down to just 3.90%, but it remains nearly double the Fed’s 2% target.

It may be difficult for the FOMC to justify any interest rate cuts until the overheating U.S. economy cools and inflation drops significantly lower. The latest jobs market data suggests that a slowdown isn’t imminent. The economy has averaged more than 250,000 jobs created per month over the past three months, including 336,000 in September.

Jason Steeno, president of CoreCap Investments and CoreCap Advisors, said the Fed is unlikely to cut interest rates anytime soon given there are still currently 1.5 jobs in the U.S. economy for every available worker.

“While this number has decreased from last year, it, coupled with high inflation, still indicates an economy that is running hot and fast,” Steeno said.

Heading into 2024, Americans anticipating the trajectory of savings rates should monitor monthly data on the U.S. jobs market and core PCE inflation, as well as policy meetings and commentary from the Federal Reserve.

How high will savings rates go?

If the Federal Reserve has reached its terminal interest rate of the current tightening cycle, savings rates may have already reached their peak levels. The FOMC has said there is likely one more rate hike on the docket in 2023, but investors in the bond market seem skeptical.

Either way, Jeff Rose, certified financial planner and founder of Good Financial Cents, said yields on savings accounts are unlikely to get much higher than their current levels in 2024.

“With the Fed juggling inflation and potential recession concerns, I suspect interest rates will remain flat or relatively unchanged in 2024,” Rose said.

However, if the labor market stays tight and inflation either remains sticky or rebounds higher unexpectedly, the Fed may have no choice but to continue to raise interest rates to new highs in 2024. In that case, savings rates would likely continue to rise largely in step with the fed funds rate.

Strategies for maximizing savings rates

It’s difficult to predict whether the Federal Reserve has reached its terminal interest rate and when exactly the central bank will begin cutting rates, but there are several strategies Americans can utilize right now to take advantage of historically high savings rates.

1. Make sure extra cash is earning

Even with interest rates soaring, most bank accounts are still not paying particularly impressive interest rates on deposits. As of September, the Federal Deposit Insurance Corp. reported the national average interest rate on a savings account was just 0.46%, while the average interest rate on an interest checking account was just 0.07%.

Mark Henry, founder and CEO of Alloy Wealth Management, said checking accounts can be an American’s worst enemy during periods when interest rates are high.

“Keep any and all emergency funds and savings in a high-yield savings account or a money market account. There is no need to keep large amounts in a checking account unless you know you have big expenses coming up,” Henry said.

Online banks such as CIT Bank, BMO Alto and Bask Bank offer savings accounts that pay 5% interest or higher for qualified customers. Just make sure any bank you choose is an FDIC member bank so your deposits are insured in the event of a bank failure.

2. Lock in high rates

For Americans who believe savings rates have peaked and who don’t need access to extra cash anytime soon, there are ways to lock in high rates for an extended period.

Bank certificates of deposit are FDIC-insured financial products that are similar to savings accounts. However, CDs lock in an interest rate for a set period, typically between one and five years. The caveat? CDs also lock up the buyer’s principal and impose stiff penalties on customers who need to access their money before the CD matures.

In addition to CDs, Steeno said certain Americans can take advantage of multiyear guaranteed annuities (MYGAs), which are fixed annuities that offer a guaranteed fixed interest rate for a specified period, typically between three and 10 years. 

“Those looking to park money for a longer period who are not concerned with liquidity could opt for multi year guaranteed annuities that are paying more than 6% with the benefit of interest deferral,” Steeno said.

MYGAs offer investors tax deferral and may be appropriate for Americans approaching retirement age.

3. Pay down high interest debt

One unconventional way for Americans to optimize their finances when interest rates are high is to pay down high-interest debt. Earning 4% or 5% in a high-yield savings account may be tempting, but Rose said you’d be better off paying down your credit card debt.

“Paying down high-interest debts, like credit card balances that often carry interest rates above 15%, guarantees a return equivalent to the avoided interest,” he said.