The Federal Reserve Could Give Savers Good News in November — Here's Why

The Federal Reserve not only cut interest rates in September for the first time in more than four years, but it did so rather aggressively. Typically, the Fed likes to lower interest rates by 25 basis points (one-fourth of a percent) at a time, unless there’s some sort of economic emergency like the COVID-19 pandemic, for example. However, the Fed decided to start the rate-cutting cycle by doing a larger 50-basis-point cut to the benchmark federal funds rate.

Soon after that decision was announced, experts quickly increased their expectations for future rate cuts. However, in the time since then, interest rate projections have shifted, and in a way that could be favorable to consumers with money in high-yield savings accounts.

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Rate cut expectations have shifted

After the Fed’s decision to aggressively cut rates in September, experts started to wonder whether the sharp rate cuts would continue. However, thanks to generally strong economic data and recent inflation numbers, the expectation has shifted.

At the end of September, experts were unsure about whether we’d see a standard 25-basis-point rate cut in November, or if we’d get another “double” rate cut. According to the CME FedWatch tool, which tells us the future interest rate expectations priced into financial markets, a month ago (Sept. 30), there was a 65% chance of a single rate cut and a 35% chance of a double.

Now it’s a different story. As of Oct. 29, the markets were pricing in more than a 98% chance of a 25-basis-point rate cut at the conclusion of the Fed’s November meeting. Not only that, but the probability for a double rate cut is effectively zero. There’s a 1.6% chance that the Fed doesn’t cut rates at all in November, according to the tool.

What does this mean for savings and money market accounts?

To be perfectly clear, the interest rates paid by savings accounts and money market accounts don’t have a direct link to the Federal Reserve’s benchmark interest rates. In other words, if the Fed cuts rates by 0.25% at its November meeting, there’s no rule that says savings interest rates have to fall by the same amount (or at all).

However, since the Fed’s rate cuts affect banks’ costs of borrowing money, the rates tend to move in the same direction. Since the September rate cut, many top online banks have lowered their savings rates, although many have done so at a lesser magnitude than the Fed’s cut. As a personal example, while the Fed lowered the federal funds rate by 50 basis points, my high-yield savings account interest rate fell by 30 basis points soon after.

The bottom line is if the Fed lowers rates by 25 basis points as expected, it would be reasonable to expect savings and money market interest rates to fall as well. But the decline is likely to be significantly less than if the Fed had decided to make another double rate cut, which now appears to be off the table for November.