Savings account interest rates fluctuate over time, usually tracking up and down with the federal funds rate, which is the rate set by the Federal Reserve to influence how much it costs for banks to borrow and lend one another money overnight.
Because the Fed often adjusts interest rates during recessions, steady economic growth, inflation, and economic booms, some seasons may be better for savings interest rates than others.
Key Takeaways
- Savings account rates tend to fluctuate with the federal funds rate, which the Federal Reserve sets to control the costs of borrowing and lending between banks and to maintain economic and financial stability.
- Despite a long period of economic growth between 2009 and 2020, savings account yields remained relatively low.
- When the Federal Reserve raises rates to combat inflation, savings account rates tend to go up, too.
Savings Account Rates During Recessions
Generally speaking, economic recessions are marked by a slow economy, rising unemployment, and a decline in consumer spending. To stimulate the economy and encourage people to spend more, the Federal Reserve often lowers interest rates.
Lower interest rates can be welcome if you’re looking to take out a mortgage or a personal loan. However, they’re not so beneficial when it comes to your savings account, as a lower rate leads to lower returns on your deposit.
“During recessions, interest rates usually decline as the Federal Reserve cuts interest rates to try and spur the economy,” said Doug Carey, a Chartered Financial Analyst and president of WealthTrace, a financial planning and retirement planning software company.
Before the Great Recession in early 2007, banks such as HSBC Direct, ING Direct, Citibank, and Emigrant Direct were offering savings account yields between 4.5% and 5.05%. By the end of the Great Recession in late June and early July 2009, however, the average national rate was just 0.21%, according to Federal Deposit Insurance Corporation (FDIC) data.
When rates are low, banks are often able to borrow money cheaply. As a result, they don’t have as much of a need for consumer cash reserves; thus, their incentive to offer high savings yields to attract new customers goes down.
Savings Account Rates During Steady Economic Growth
When the economy is steadily growing, the Federal Reserve usually doesn’t need to lower rates. In fact, rates typically remain steady to allow the economy to continue doing well.
The years following the Great Recession were marked by the longest period of economic growth in U.S. history. From mid-2009 to 2020, economic growth averaged 2.3% per year. During this time, savings account interest rates dropped, leveled off from 2012 to 2016, rose slightly, and leveled off through March 2020.
“This is when we generally see savings interest rates increase or at least stay at stable levels, assuming inflation is under control,” Carey said.
Savings rates were much higher during the housing bubble leading up to the Great Recession, often around 5%. Since the Great Recession, savings account rates have remained fairly steady but also stayed quite low, never surpassing 0.5% for non-jumbo deposits.
Savings Account Rates During Inflation
During a time of inflation, currency tends to lose value as the price of goods and services increases. The Federal Reserve often raises rates to combat growing inflation, which can sometimes lead to better savings account interest rates for consumers.
“With high inflation, interest rates usually increase,” Carey said. “From 1970 until the early 1980s, we saw interest rates steadily climb as inflation took off. The interest rate on savings accounts went from about 5% to an incredible 15% over that time.”
The rise in rates was largely due to investors demanding that they be paid at least the rate of inflation on their investments, Carey said. At the same time, the Federal Reserve was increasing interest rates to try to stamp out inflation.
In May 2022, inflation hit a 40-year high. Correspondingly, the Federal Reserve increased rates several times. These rate hikes broke savings rates out of their slump, nearly tripling the average national savings rate from April to September.
Savings Account Rates During Economic Booms
An economic boom is characterized by fast growth and a rise in consumer demand for goods and services. During a boom, the Federal Reserve may increase or decrease rates, depending on its goals.
“If the boom is mostly due to the Federal Reserve decreasing interest rates, which is what we have seen many times over the past 20 years, then interest rates are declining while economic growth accelerates,” Carey said.
However, the opposite can also happen. “If the economic boom is caused by people saving less, taking on more debt, and spending more, many times we see inflation increase and interest rates go up as a result,” he said.
Some savings accounts offered 15% rates during an economic boom in the 1980s, Carey noted. While rates decreased in the following years, banks were still offering around 5% in 1990, significantly higher than the sub-1% rates during the mid-2010s.
Note
The Federal Reserve does not provide readily available data for the average national saving rates before 2009.
Frequently Asked Questions (FAQs)
What is the highest savings account rate in history?
FDIC data on savings rates between 2009 and 2022 shows a peak national rate of 0.22% and national rate cap of 0.97% in May 2009. However, reports from the 1990's indicate a 7.47% rate from at least one bank. When the federal funds rate surpassed 19% in 1980, consumers may have seen even higher savings account rates, although official data is not readily available.
Are savings account rates going up anytime soon?
It depends. If an economy is experiencing inflation, there's a good chance your rates will climb as inflation climbs because the Fed may raise rates as a way to lower it. However, if an economy is in the middle of a period of sustained growth, you may not see much movement in your rates. Either way, predicting where savings interest rates will be in six months, a year, or longer is tough because economies can be hard to forecast.
