Here’s the funny thing about interest rates: They affect how much you pay to borrow money, but also how much you can earn by saving money. So when you don’t need a loan, it’s actually good news when rates are high.
And that’s where we are today. Despite recent reductions, the Federal Reserve’s benchmark interest rate is still much higher than it’s been for most of the last two decades, and officials have indicated they may not cut it a whole lot more this year.
A quick recap of how we got here: The Fed cut its rate — known as the fed funds rate — to virtually zero during the 2020 pandemic, but reversed course two years later, cranking it up to a 22-year high in order to quash a major spike in inflation. When inflation eased, Fed officials did back off a bit, but they’re treading more carefully now. Inflation is still too hot, they say, and there’s a lot of uncertainty about where things will go in 2025.
Here’s how this all affects you. Even though the fed funds rate doesn’t apply directly to consumer products (it’s actually a bank-to-bank cost of doing business), banks use it as the basis for setting both the rates they offer on savings accounts and the rates they charge on loans. (And yes, they are connected — the more banks get from borrowers, the more they can pay savers.)
So a higher fed funds rate means that borrowing in general will continue to be relatively expensive compared to a few years ago — bad news if you carry a credit card balance or are hoping to buy something big, like a house, this year. (There are other factors with mortgage rates, but the same fundamentals apply.)
Your savings, however, can benefit from these higher rates. High-yield savings accounts feature a significantly higher APY than the highest-paying accounts did a few years ago, according to Investopedia. (SoFi offers a high yield savings account with a 3.80% APY.)
So what? Americans are feeling cautiously optimistic about their savings in 2025: 44% think they will be able to save more money this year, in contrast to 24% who think they will save less, according to a new Yahoo Finance/Marist Poll.
And it doesn’t look like interest rates are coming down any time soon — at least not by much. So, if you have money socked away in an emergency fund or a future home renovation account, this is a good moment to take advantage of those rates.
Related Reading
• The Fed Could Cut Rates Again. What Should Savers Do About CDs and High-Yield Accounts? (Kiplinger)
• If Interest Rates Remain ‘Higher for Longer,’ the Winners Are Those With Cash Accounts(CNBC)
• How Does Raising Interest Rates Help Inflation? (SoFi)

photo credit:iStock/AndrewLilley
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