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Do the Fed’s Rate Cuts Have Any Affect on High-Yield Savings Accounts?

Written by Banks Editorial Team

Updated April 21, 2021​

3 min. read​

Savvy savers who are taking advantage of online high-yield savings accounts are not going to be pleased with the Fed’s recent decision to shift course and lower interest rates. That’s because, though they’re not directly indexed to the Fed’s short-term interest rate, these savings plans are likely to decrease the rates they pay savers to match or exceed the quarter of a point cut implemented by the Fed.

In fact, some online banks began cutting their high-yield rates even before the Fed lowered rates in anticipation of the cuts. This allows them to spread out the interest rate reduction so savers might not notice a dramatic cut.

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What Exactly Are High-Yield Savings Accounts?

Online banks and robo-advisors are able to offer higher interest rates on savings accounts because they don’t have the high overhead costs of brick-and-mortar banks and credit unions. Robo-advisors, which are machine-based financial advisors, offer the highest rates because they require little human capital.

An analysis by DepositAccounts in June showed online savings accounts were paying an average of 1.69 percent, compared to just 0.28 percent at brick-and-mortar banks and 0.25 percent at credit unions. Robo-advisors were offering rates around of 2.5 percent. For example, Wealthfront was offering an APY as high as 2.57 percent before the Fed rate cut, but that has followed the quarter of a point drop and now stands at 2.32 percent.

Historically, interest rate changes that savers see lag a month or two behind the Fed’s adjustments in its short-term interest rates. But they will eventually fall.

Can These Numbers Make a Difference in Your Future?

While the difference in these interest rate numbers might not seem huge, high-yield savings accounts are a safe way to invest your savings and grow your money ahead of the rate of inflation.

But few Americans are taking advantage of these opportunities. According to a survey conducted in May by Bankrate, only 14 percent of savers are earning more than 2 percent on their short-term savings. Another 20 percent reported receiving less than 1 percent on their savings. Even more shocking, 24 percent reported earning no interest on their savings. The Federal Reserve reports that the average savings account balance in America is $8,863. A compound interest calculator provided by the U.S. Securities and Exchange Commission, shows at 2.5 percent, that savings would grow by $1,180 over five years. At 0.25 percent, the gain would be a mere $111.

That’s a lot of money to be leaving on the table, especially for a generation that struggles to save money for the future and lacks faith in the future of the Social Security system.

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Why Aren’t Americans Doing More with Their Money?

The Bankrate survey also asked participants why they were willing to accept such a small payout on their savings. Nearly 4 in 10 (36 percent) said they were comfortable with their current situation. Another 34 percent said they prefer to have a local branch where they can access their money.

But these are just excuses that allow the brick-and-mortar companies to make money off their hard-earned dollars while the saver falls further behind the rate of inflation.

Another quarter of participants said they were concerned about the safety of their money. But a majority of online banks are FDIC insured, just like their brick-and-mortar cousins. In fact, many are owned by the brick-and-mortar banks but operate separately so they can pass along their savings through higher interest rates and fewer fees.

Not having enough savings to bother with finding an online bank was another excuse cited frequently in the survey. Some online banks have no minimum or extremely low minimum (like $1) for their savings accounts, yet they still offer payouts close to or even above 2 percent.

The excuse of the inconvenience of opening an online savings account or transferring money to the account also falls apart when you look at the numbers. It can take as little as five minutes to open an online savings account. Then you can link the account to your brick-and-mortar checking account, making transfers equally simple. You don’t lose the relationship with your local bank, but you quickly and easily see a greater return on your hard-earned savings.

The Bottom Line on High-Yield Saving Accounts

The bottom line: Those who already are taking advantage of high-yield saving accounts offered by online banking and robo-advisors are likely to take a hit as the Fed moves to lower interest rates. But that hit is going to be peanuts compared to the hit many of your fellow savers already experience by sticking with savings in their brick-and-mortar banks.
Even better, these online savings accounts remain a safe place for you to stash your savings without having to deal with the volatility of the stock market or even mutual funds.
If you’re ready to put your stagnant savings to work for your future,’s partner can help you find the right savings plan for your needs.

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