It’s been a tumultuous couple of years for interest rates. After reaching a historic low during the COVID-19 pandemic, the Federal Reserve enacted a series of rate hikes in 2022 and 2023—culminating in the highest rates in decades—in an effort to fight persistent inflation. So far, in 2024, the Fed has held its rate steady at 5.25% to 5.50%. Though many economists expect rates to decrease this year, the number of cuts, and how steep they might be, remain unclear. And it’s always possible that rates could remain unchanged or even increase if economic conditions shift.
Learn more: SoFi’s Liz Young Thomas Looks at the Fed’s May Statement
Changes to the Fed’s interest rate, or federal funds rate, almost invariably create a ripple effect of changes throughout the economy, impacting interest rates on loans, mortgages, and savings. Here’s a closer look at the Federal Reserve and how its economic outlook and policies can impact your accounts.
Q: What Is the Federal Reserve?
A: The Federal Reserve System was founded by Congress in 1913, with the primary goal of promoting the stability of the U.S. banking system. Since then, the Fed’s mandate and methods have evolved—today the work includes regulating financial institutions, directing monetary policy, managing inflation, and keeping employment rates high. And one of the key levers it pulls to those ends is adjusting the federal funds rate.
Q: What Is the Federal Funds Rate?
A: Banks frequently borrow money from one another to ensure they have sufficient reserves to cover consumer withdrawals and other commitments. The federal funds rate influences the interest rate U.S. banks use when lending money to other banks.
The federal funds rate is set by the Federal Open Market Committee (FOMC), which is responsible for setting a range of monetary policies that can influence inflation and economic growth. The FOMC is made up of 12 members who meet approximately every six weeks to discuss a range of economic policies, including adjustments to the federal fund rate.
Q: What Factors Influence the Fed’s Rate?
A: The FOMC determines interest rate policy based on a wide range of economic indicators including inflation, employment levels, and durable goods orders data, which can provide insight into the economic health of a variety of industries such as technology, transportation, and manufacturing.
When these market indicators suggest that the economy is languishing, the FOMC may reduce the federal funds rate to make borrowing less expensive in the hopes of boosting economic activity. More money in consumers’ pockets typically means more spending and more money streaming into the economy.
When prices are rising too quickly, the FOMC may increase its interest rate, making it more expensive to borrow. That can slow spending and, in theory, help keep inflation in check.
Q: How Does the Fed Influence My Savings APY?
A: As mentioned above, the federal funds rate directly influences the interest rates banks use to borrow from or lend money to one another. But secondary effects eventually impact the wider economy, including the interest rates banks and financial institutions use when lending money through credit cards, personal loans, and mortgages. It can also affect the annual yield percentage, or APY, for savings accounts.
A federal rate decrease should eventually translate into lower interest rates when you borrow money to buy a house or car. It may also lead to a lower APY on your savings account.
When the federal rate increases, on the other hand, it becomes more expensive to borrow money, and savings account APYs typically increase.
Because most savings account APYs are variable, they tend to rise or fall in the wake of federal rate changes. There are accounts—such as fixed-rate certificates of deposit offered by some banks and credit unions—that have APYs that do not change, regardless of how the federal fund rate fluctuates.
Q: Do Other Factors Influence My Savings APY?
A: Federal fund rate changes have a substantial influence on saving account APYs—but they are not the only factor.
Some banks offer high-yield savings accounts with APYs that are considerably higher than the national average rate. Online-only banks and credit unions, for example, generally have less overhead than traditional brick-and-mortar banks, which may influence their ability to offer higher APYs.
Larger banks tend to be less dependent on deposits than those with a smaller regional presence, for example, so those smaller banks may offer higher rates.
Competition among banks for consumer deposits may also drive changes to the APYs they offer.
Even among these different scenarios, however, the Fed’s interest rate adjustments can still influence whether these banks’ APY rates rise or fall over time.
Recommended: What Is a Good Interest Rate for a Savings Account?
Q: How Has the Fed Adjusted Rates Recently?
A: After the economic crisis of 2008, the Fed presided over a period of relatively low and stable interest rates. Rates began to tick up gradually in 2015 until the COVID-19 pandemic upended the economy in 2020. The FOMC followed with two steep rate cuts to encourage economic activity, at the time, bringing interest rates down to historic lows.
Since then, as the U.S. has grappled with its highest rate of inflation in decades, the Fed has initiated a series of increases, culminating with a rate of 5.25% to 5.50% in July 2023 — the highest level in 23 years.
Federal Funds Target Rate (2015-2024)
Source: Federal Reserve Bank of St. Louis
Q: When Will the Next Rate Change Come?
A: The FOMC typically convenes eight times per year—but it does not necessarily adjust rates at every meeting. In addition, banks and financial institutions sometimes adjust their own interest rates ahead of FOMC meetings, especially when economic conditions or signals from the Fed suggest a rate change may be forthcoming. The Fed publishes the schedule of FOMC meetings on its website.
The Takeaway
While the FOMC sets the federal funds rate to directly influence the rates banks use to lend money to each other, the rate has a broader effect on the U.S. economy, impacting many financial services and products including personal loans, mortgages, and savings accounts.
Photo credit: iStock/Sadeugra
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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