What Lower Interest Rates Would Mean for Your Bank Accounts
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Nicole Spector
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Chris Cluff
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In an effort on the Fed’s part to combat inflation, interest rates have been on the rise.
An increase in rates makes it more expensive to borrow money, which hurts Americans looking for reasonable auto loans or to take out mortgages. But high interest rates aren’t without a big perk: They encourage banks to pay more interest on certificate of deposit accounts (CDs) and high-yield savings accounts (HYSAs). As such, Americans with HYSAs have been seeing their cash get huge returns. Some banks have been offering north of 5% APY on these accounts of late.
So, this brings us to the question: What will happen to the money in your bank accounts should interest rates lower? And, how might your financial behavior shift?
You’d Get Lower Rates on Your Savings and Other Interest-Bearing Accounts
“If this happens, the most competitive yields offered on HYSAs, money market mutual funds, Treasury bills and CDs will undoubtedly decline proportionately,” said Thomas Brock, CFA, CPA and expert contributor at Annuity.org.
The timing is the tricky part. Some banks adjust their rates in timing with the Fed’s moves while others have their own timeline.
“Not [all] financial institutions make moves in lockstep with the Fed,” Brock said. “Some strategically implement slight rate cuts in advance of the Fed, while others intentionally lag the Fed. That said, outliers rarely ever deviate too far from the pack.”
Certificates of Deposit Will Become Less Appealing
If interest rates fall, CDs will lose some allure because you’ll no longer be able to lock in rates that were as high as 5.92% in early May.
“CDs are often favored for their safety and predictable returns,” said Michael Hills, financial advisor at Apex Wealth. “However, in a low-interest-rate environment, the fixed returns offered by CDs become less attractive. This is because the return on investment does not keep pace with inflation or compare favorably with the potential returns from other, more dynamic financial instruments. As a result, investors may shy away from locking their money into CDs, which can lead to a shift in how personal and retirement funds are allocated, impacting the broader financial planning landscape.”
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You May Be Less Inclined To Save — and More Inclined To Spend
Everyone needs to be consistently building up a nest egg to protect them from accruing debt after an unexpected expense as well as for their golden years. But you may find yourself less motivated to stash cash in a savings account or CD thanks to those decreased rates.
“When people earn less interest on their savings accounts and CDs, they may perceive that their money is not working effectively for them,” Hills said. “This scenario can shift consumer behavior from saving to spending, as the immediate benefits of purchasing goods and services or investing in higher-risk options seem more attractive than the minimal growth of their savings. Such a shift can stimulate economic activity in the short term but might undermine personal financial stability and long-term savings goals.”
Alternative Investments Will Become More Appealing (for Better or Worse)
With HYSAs and CDs becoming less attractive in a low-interest-rate environment, investors may look to alternative investment opportunities that offer higher returns.
“This shift can increase the flow of capital into stocks, bonds, real estate and even more unconventional ventures like private debt and private equity,” Hills said. “While these options may offer the potential for higher returns, they also come with increased risk. This trend can lead to greater market volatility and expose investors to more significant financial losses if not adequately diversified or managed. The overall effect is a more dynamic but potentially riskier investment environment.”
Will Interest Rates Lower?
Now that we’ve got an understanding of what happens to the money in your bank when interest rates go down, we need to delve into a burning question: Will interest rates lower?
The answer isn’t yet known, but right now it’s not looking like interest rates will drop in the near future.
“I don’t see much movement towards lower interest rates for the rest of this year, primarily because inflation is sky high and because of the incredibly high level of spending being done by our government,” said Stuart D. Boxenbaum, president, investment retirement advisor at Statewide Financial Group. “There is no indication that anything is going to change anytime soon. In addition, oil prices, which impact the inflation rate, show no sign of going down because we are not in control of how much oil is produced here due to federal policies.”
Brock said it is unlikely we will see three rate cuts by the end of 2024. “However, if inflationary pressure dissipates, we could see one to two rate cuts during the second half of the year.”
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