It eventually happens to all savers: You’ll receive that dreaded email or letter from your bank informing you that the annual percentage yield (APY) on your savings account dropped.
In fact, many savers have been receiving these letters recently. The reason? The Federal Reserve cut rates at each of its last three meetings due to declining job growth. And when that happens, banks follow suit by lowering APYs on all savings accounts.
Therefore, if this has happened to you or you’re concerned it could happen soon, I’ll cover the next steps you should consider.
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Why do banks lower savings account APYs?
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Banks can alter the terms of your savings accounts for multiple reasons. Primarily, this happens when the Fed cuts rates.
Why? Because banks use the federal benchmark rate to determine APYs. When this rate drops, it reduces borrowing costs, which also reduces the profit a bank can earn from loans, so they pull back on paying out higher returns on savings accounts.
Rate cuts are not the only reason banks lower APYs. If you’re on a promotional rate, when that term expires, you’ll also receive a lower return. Banks can also lower APYs if they have too much money on deposit and don’t want to cut into their profits. Regardless of the reason, knowing all of your next steps can help you make the best choice for your money.
Does it make sense to stay with the same account?
It depends on what you’re planning to do with the money in your savings account. If you’re using the account for short-term savings goals, the cuts won’t impact your earnings much unless you have larger balances.
To illustrate, suppose you have $5,000 in your high-yield savings account, earning 4.00% APY. Over the course of a year, you would earn $204.04 in interest. If it dips to 3.75% APY, you’ll receive $191.05; that’s not a significant difference, especially if your goal is only to maintain those savings for the short term or to hold an emergency fund that’ll grow conservatively.
However, if you’re looking to truly maximize your earnings, see how your new rate compares to some of the best high-yield accounts:
I like these accounts because even with rate cuts, their APYs remain higher, helping you stay ahead of inflation. And in the case of Newtek Bank, you’ll earn one of the highest APYs available, with no account fees or balance minimums.
If those rates are significantly higher than your new rate, you should consider switching banks. Thankfully, this is easy to do.
Online bank accounts usually only take minutes to set up by providing all of your basic information (name, address, Social Security number, etc.), and you can fund them via an ACH transfer from your old savings account. Once you do that, you can close your old savings account and enjoy higher returns.
Explore other savings options
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If you’re not thrilled about rate cuts impacting your earnings, consider other savings options. A CD can shield your money from rate cuts since they have fixed interest rates.
If you’re earmarking money for specific goals, CDs help you stay on course. You can map out exactly how much you’ll earn over the course of the term, and there are no surprises. Additionally, most CDs have early termination fees, which means if you break the CD term before it matures, you’ll lose money, so you’re incentivized to keep storing those savings.
How much you lose depends on the term. For short-term CDs of a year or under, you’re looking at a few months, while longer-term CDs can cost you six months to a year in earned interest. Therefore, before signing up for one, ensure you can tie up your money comfortably for the term, or choose a shorter term that works better for you.
You can find the best CD rates and terms that work for you using this Bankrate tool:
Meanwhile, if you’re concerned about liquidity but don’t want rate cuts eating into your returns, consider a no-penalty CD. They offer fixed interest rates, but you can also access your cash after the vesting time. The vesting period runs from one week to a month, depending on the bank.
Keep in mind that withdrawing it early means you won’t maximize your return. But you also won’t have to pay an early withdrawal fee.
Are more rate cuts on the horizon?
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In the short term, it doesn’t seem likely. David Payne, of the Kiplinger Letter, notes the Fed will likely leave rates unchanged when it meets in January, as Fed Chair Jerome Powell wants economic trends to dictate the Fed’s future policy.
This also mirrors what other economists forecast. CME FedWatch reports there’s an 88% chance the Fed doesn’t cut rates at its January meeting.
That said, there are two things to watch in 2026: President Donald Trump will appoint a new Fed chair very soon, and he has said he wants someone who would make more aggressive rate cuts. However, there are 12 voting members on the Federal Open Market Committee, so the chair change alone might not sway a voting majority for more rate cuts.
The other thing to watch is what Powell does next. While Powell’s term as Fed chair ends in May, he has two years remaining as a Fed governor, meaning he can continue to vote on Fed policy. If Powell leaves, it would create a majority among Trump appointees within the seven-member board of governors, as he gets to pick Powell’s successor.
Keep an eye on rate cuts and how they impact your goals
Ultimately, rate cuts can diminish returns. But it doesn’t mean there aren’t ways to protect your money from them, either. You can switch to a CD or find a HYSA that offers rates high enough that a small drop will have minimal impact on your earnings.
The key is to focus on your goals and be flexible as rates change. Doing so can help you spot the right accounts to help you reach your savings goals quicker, even in a rate change environment.
