You’ve probably noticed that banks have been paying much higher interest rates than at any time in the last decade or so. The last time we saw rates as high as today, it was back in the late 2000s.
Interest rates are so high in part because of the actions of the Federal Reserve. Specifically, the Federal Open Market Committee (FOMC).
The FOMC meets eight times a year and decides, among other things, whether or not to change the target federal funds rate. That target federal funds rate is what banks look at to determine their own interest rates on savings accounts, money market accounts, certificates of deposit, and more.
Let’s dive in.
Table of Contents
🔃Updated January 2025 with the results of the January 2025 meeting of the Federal Open Market Committee when it, again, lowered the target Federal Funds Rate, it is now 4.25% - 4.50%.
What is the Federal Open Market Committee?
The Federal Open Market Committee is a group of twelve people:
- seven members of the Board of Governors of the Federal Reserve System (Federal Reserve Board),
- the president of the Federal Reserve Bank of New York,
- four of the remaining eleven Reserve Bank presidents – serve 1-year terms and rotate
The members of the Federal Reserve Board are appointed by the President of the United States (confirmed by the Senate) and serve 14-year terms.
The president of a Federal Reserve Bank is selected by the Bank’s Class B and C directors and approved by the Board of Governors.
The rotating seats, of which there are four, are selected from these groupings:
- One from Boston, Philadelphia, or Richmond,
- One from Cleveland or Chicago,
- One from Atlanta, St. Louis, or Dallas,
- One from Minneapolis, Kansas City, or San Francisco.
The other presidents attend the meeting but do not vote.
The FOMC meets eight times a year in (roughly) January, March, May, June, July, September, November, and December.
At those meetings, the FOMC discusses quite a bit about monetary policy and the economy but the primary tool that impacts you, as a saver, is how the FOMC uses open market operations to “set” the target federal funds rate. This is what the FOMC would like banks to charge one another to borrow funds overnight.
The current federal funds target rate (range) is – 4.25% - 4.50% (last changed in January 2025).
How the federal funds rate affects savings
When the FOMC increases the federal funds rate, it pushes banks to increase their rates too. Remember, the target rate is what the FOMC would like it to cost banks to borrow from one another.
It’s also what the public sees – so they expect banks to raise their rates. And some do, which leads to more competition. This leads to more banks doing it – so there’s a link between the two but it’s not a direct one. It’s not like banks look at the target rate and are, in some way, forced to increase rates.
The invisible hand of the market still plays a role.
The Federal Reserve raised the target federal funds rate four times in 2023 as it tried to get inflation under control – which means banks have followed suit and raised their rates as well.
But for most of 2024, the Fed has kept rates flat and only recently, since the September meeting, they start cutting rates. Bank rates have fallen to match.
Online banks, the ones with the highest rates already, tend to move more quickly to adjust their rates. If you look at the savings rates of some of the biggest national banks, they’re still under 0.05% APY. Our list of the best high-yield savings accounts is predominantly online banks for a reason.
How does the media predict rate moves?
They don’t.
Whenever the media talks about the probability of a rate change (or being unchanged), they’re always referring to the CME FedWatch Tool. The CME Group is a financial services company in Chicago and they run the Chicago Mercantile Exchange, the Chicago Board of Trade, and several other exchanges (it also owns 27% of the S&P Dow Jones Indices).
They list target rate probabilities based on Fed Funds futures contract prices, so essentially they are getting a consensus from traders themselves (well, technically the subset of those traders that trade futures contracts).
If you click through to the CME FedWatch Tool, you can see what the contracts predict.
Also, the Fed releases economic projections which includes a “dot plot” of what the different members think rates will be in the future. In the September release, we can see that the FOMC expects more rate cuts and for rates to go even lower in 2025 and 2026.
What should spenders do?
We are currently in a falling interest rate environment with talks of more rate cutes on the horizon, we know this because the Fed has cut rates a few times in 2024 and looks to lower it twice more in 2025.
The most recent comments by the FOMC seems to indicate that they cut rates by 25 basis points but may only cut rates twice in 2025. This means that it makes sense to go with banks with the highest yield and that you should lock in rates while you can.
Here are the results from recent meetings (starting from when they increased it from 0.00%):
| 2022-2025 FOMC Meetings | Rate Change (bps) | Federal Funds Target Rate |
|---|---|---|
| January 2025 | 0 | 4.25% – 4.50% |
| December 2024 | -25 | 4.25% – 4.50% |
| November 2024 | -25 | 4.50% – 4.75% |
| September 2024 | -50 | 4.75% – 5.00% |
| July 2024 | 0 | 5.25% – 5.50% |
| June 2024 | 0 | 5.25% – 5.50% |
| April/May 2024 | 0 | 5.25% – 5.50% |
| March 2024 | 0 | 5.25% – 5.50% |
| January 2024 | 0 | 5.25% – 5.50% |
| December 2023 | 0 | 5.25% – 5.50% |
| October/November 2023 | 0 | 5.25% – 5.50% |
| August 2023 | 0 | 5.25% – 5.50% |
| July 2023 | +25 | 5.25% – 5.50% |
| June 2023 | 0 | 5.00% – 5.25% |
| May 2023 | +25 | 5.00% – 5.25% |
| March 2023 | +25 | 4.75% – 5.00% |
| February 2023 | +25 | 4.50% – 4.75% |
| December 2022 | +50 | 4.25% – 4.50% |
| November 2022 | +75 | 3.75% – 4.00% |
| September 2022 | +75 | 3.00% – 3.25% |
| July 2022 | +75 | 2.25% – 2.5% |
| June 2022 | +75 | 1.5% – 1.75% |
| May 2022 | +50 | 0.75% – 1.00% |
| March 2022 | +25 | 0.25% – 0.50% |
When Rates Rise…
As rates go up, the cost to borrow goes up. When the Fed raises interest rates, they’re hoping to slow the economy and all borrowers can expect to pay more in interest payments.
If you are carrying a large loan balance with a variable rate, you should try to pay that down because rates will go up as the Fed increases rates. Credit cards are notorious for this. They will increase rates as the Fed increases rates.
If you are looking to lock in a fixed rate, like a mortgage, that is a bit trickier because rates fluctuate along with housing demand too.
As a general rule, the longer you wait in a rising rate environment, the higher your interest rates is likely to be. Not guaranteed, but likely. As we saw in 2023, they did go up along with the rate hikes but then peaked as demand waned. But now that rates have held steady with expectations that they will go down, we’re seeing those same rates sag.
When Rates Fall…
The reverse is true – the cost to borrowing goes down and the interest you earn in savings goes down too. You can essentially reverse the above.
What should savers do?
Compared to spenders, you’re on the other side of the coin.
It may be time to lock your savings up for the long term.
We are starting to see long-term CD rates go down after all these rate pauses.
12-month CDs can make sense but no-penalty CDs are a strong option right now if you want to lock in for some time with a higher yield. As of this writing, the highest 12-month CD we have listed yielded 4.10% APY while the highest no-penalty CD was a 12-month at 4.00% APY.
If your savings are at a brick-and-mortar bank that is paying you less than 1.00% – you should change banks. Maybe look at some bank bonuses to see if you can get extra cash to move but you really need a bank that pays you a little bit of interest on your savings!
