Why Do High-Yield Savings Account Rates Change?

Quick Answer

High-yield savings account interest rates are influenced by several factors, including the Federal Reserve's federal funds rate, economic shifts and the bank's internal policies. As federal rates are adjusted, the economy changes and bank policies shift, your account APY may also increase or decrease.

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High-yield savings accounts offer interest rates that are much higher than what you can get with a traditional savings account. But those rates are variable and can fluctuate frequently based on certain factors, including the federal funds rate, shifts in the economy and the bank's policies.

Here's what you need to know about why your high-yield savings account rate changes and whether it's a good place to stash your cash.

Why Does Your APY Increase or Decrease?

A savings account's annual percentage yield (APY) indicates how much you can expect to earn in interest over the course of a year. While the term is often used synonymously with your account's interest rate, it's generally higher because most financial institutions compound interest, usually daily, monthly or quarterly.

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Your high-yield savings account's APY can go up or down in response to the following developments.

Federal Funds Rate Changes

The federal funds rate is used by banks to lend to each other to meet overnight reserve requirements. In turn, it has a direct impact on the interest rates financial institutions charge on certain loans and the rates they offer on deposit accounts.

The Federal Reserve adjusts the federal funds rate up or down to help maintain a healthy inflation rate, so when inflation is high, expect a higher high-yield savings account APY. When it's low, you can expect a lower APY.

Economic Shifts

In addition to inflation, savings account interest rates can be influenced by other economic activity.

For example, increased consumer spending could result in more demand for short-term loans like credit cards and personal loans. As a result, financial institutions may offer higher savings rates to attract more deposits, which they can use to fund those loans. In contrast, lagging consumer demand for debt could give banks less of an incentive to offer high savings rates.

Bank Policies

When comparing high-yield savings accounts, you'll notice that banks typically offer different rates. That's because each bank has its own process for determining its savings APYs based on its financial profile, strategy and forecasts.

A smaller online bank may also offer high APYs as a way to drum up business, which may not be as necessary for bigger banks.

Additionally, economic developments can impact each financial institution differently. Online banks, for instance, don't have the overhead costs of a physical branch network, so they may be more likely to offer higher APYs.

Is the Money in My High-Yield Savings Account Safe?

While high-yield savings account APYs can fluctuate over time, they never go negative. What's more, most banks and credit unions offer insurance as members of the Federal Deposit Insurance Corp. or National Credit Union Administration.

If your insured financial institution fails, your deposits are protected up to $250,000 per depositor, per ownership category.

Should I Keep My Money in a High-Yield Savings Account?

For U.S. consumers who could afford to set aside some cash, high-yield savings account rates have mitigated some of the impact of inflation over the past couple of years. In the latter half of 2023, APYs actually exceeded the inflation rate.

Most of the time, however, high-yield savings rates aren't enough to outpace inflation, so money kept in a savings account generally loses spending power over time.

So, does it make sense to keep money in a high-yield savings account, especially if interest rates start to lag behind the inflation rate again? Here's what to consider:

  • Your short-term goals: Regardless of how much you're earning in a high-yield savings account, it's arguably the best place to keep your money for short-term financial goals such as a down payment on a home or car or as a sinking fund for expenses like a vacation, holiday spending and home renovations.
  • Your time horizon: If you have cash that you don't need to use anytime soon but you don't want to risk in the stock market, consider a certificate of deposit. These accounts often offer higher rates than high-yield savings accounts, and rates are fixed for the account's term, so you don't need to worry about your APY fluctuating. That said, they typically require you to keep your cash in the account for a specific amount of time. If you withdraw too early, you may be slapped with a penalty.
  • Your emergency preparedness: Life is unpredictable, and a financial emergency, such as medical bills, home or vehicle repairs or even unemployment, could be devastating. While you hopefully never have to use it, keeping an emergency fund in a high-yield savings account can ensure quick and easy access.
  • Your long-term goals: If you feel comfortable with your progress with your emergency savings and other short-term goals, consider turning to an investment account for long-term financial objectives. Mutual funds, exchange-traded funds, stocks and other types of investments can offer a better return over the long run than a bank account. Additionally, retirement accounts offer tax advantages for those who qualify.

The Bottom Line

If your bank or credit union doesn't offer one, shop around and compare high-yield savings accounts so you can take advantage of a better APY. If your interest rate starts to drop, however, resist the temptation to seek out higher returns with an investment account unless the money is earmarked for long-term financial goals.

To take advantage of high savings rates, consider different ways you can save more effectively.