Reasons Why You Could Soon Be Unable to Earn 5% on Cash

The Federal Reserve has been steadily increasing interest rates over the past couple of years, with the fed funds rate reaching 5.33% as of April 19, 2024. This has been good news for investors, as they have been able to earn higher returns on their cash. However, the big question now is where will interest rates go in the future, and what does this mean for your savings?

The federal funds rate, set by the Federal Open Market Committee (FOMC), is the rate that banks charge each other to borrow money overnight. The FOMC meets eight times a year to decide on the federal funds target rate, which in turn affects the interest rates that banks offer on savings accounts and money market accounts.

After raising rates 11 times from March 2022 to July 2023 to combat inflation, the FOMC announced in December 2023 that it expected to lower the federal funds rate to 4.6% in 2024. This would be a significant reduction from the current rate of 5.33%.

Once the Fed starts cutting rates, banks are likely to follow suit, meaning that the days of earning 5% interest on your cash may soon be over. While savings accounts will still offer better rates than they did in 2022, it’s important to be prepared for a decrease in interest rates in the near future.

Overall, the future of interest rates is uncertain, but it’s likely that the Fed will start making cuts soon to see how the economy reacts. Stay informed and be prepared for changes in the interest rates on your savings accounts in the coming months.