The writing is now clear: online banks are ready to stop paying you so much to save money.
After years of competitive annual percentage yields, or APYs, many financial institutions are starting to reduce their offerings due to the economic environment.
Following recent decisions by Ally and Discover to reduce APYs on their high-yield savings accounts to 4.25%, Marcus, Goldman Sachs’ consumer bank, announced it will reduce APYs on its high-yield savings accounts yield from 4.5% to 4.4%. . This is the first time the bank has lowered, rather than increased, this APY since 2021.
“Our current rate puts us ahead of most of our peers and is eight times the national average,” a Marcus spokesperson told Money in an email. “We will continue to focus on providing value to our customers and growing our Marcus warehouse business, which is a priority for the company.”
What makes the news particularly surprising is that these banks made the decision to cut yields before any firm decision by the Federal Reserve to lower interest rates. What’s happening and what’s next?
Is the era of high yields coming to an end?
The very high APYs offered on high-yield savings accounts and other savings instruments such as certificates of deposit (CDs) and money market accounts were largely the result of interest rate increases aimed at containing inflation from part of the Fed, which began in 2022. As the banking system raised rates, it became more expensive for commercial banks to lend money to each other. This had a ripple effect that slowed the economy and incentivized Americans to save rather than spend.
Faced with higher financing costs than they were used to, banks are placing greater priority on deposits. They began competing for customers by increasing the APYs on their savings products, competing with each other to reach the top.
As a result, the last few years have given savers some of the highest APYs ever for their savings accounts. In particular, high-yield savings accounts have seen returns of 4-5%, with some banks offering up to 6%. Before this run, many online banks’ APYs hadn’t even topped 2%.
Inflation, however, has subsided and, last summer, the Fed took its first step towards lowering interest rates, suspending its series of rate hikes. At the time, it signaled that the first rate cut could potentially come in late 2023 or early 2024. Lower interest rates would mean lower funding costs for banks and less motivation for them to offer high APYs to customers .
We have not yet seen the first rate cut – partly because inflation has proven stickier than expected – and the Fed continues to remain opaque about the timing.
But savers should pay close attention.
Clark Bellin, investment director at Bellwether Wealth, says banks are free to change their APYs at any time; Marcus’ move is both reactive to current economic conditions and predictive of future Fed policy. Bellin also says other banks will likely follow suit in 2024.
“Although the Federal Reserve may delay rate cuts due to sticky inflation, we expect banks to begin reducing rates on high-yield savings accounts over the next six to nine months, as the Fed is expected to cut further interest rates at some point. this year,” he says.
An advantage for fixed rate accounts
It is worth noting that, although reduced, these returns still exceed those of brick-and-mortar banks. Nationwide, the average APY for savings accounts is 0.47%.
Additionally, many banks have already cut APYs on other savings products, particularly CDs. As of late November 2023, as CDValet.com’s Bryan Johnson told Marketwatch, Americans had 3,900 CDs to choose from that offered APYs above 5%. By last month the number had dwindled to just 3,000.
However, Bellin says investing money in fixed-rate accounts could be a smart move for savers who want more peace of mind. Unlike high-yield savings accounts, CDs are fixed-rate savings accounts, meaning depositors have that rate locked in until their tenure expires.
High-yield savings account rates can – and will – change at any time.
“Banks are constantly monitoring market conditions, and consumers should expect the rates on these savings accounts to fluctuate,” Bellin adds.
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