“We are in this ultra low-rate environment — in all likelihood for a few years,” says Greg McBride, CFA, Bankrate chief financial analyst.
Ever since the Fed made two emergency cuts in March 2020 that sent the federal funds rate down to 0-0.25 percent, savings and money market yields have been declining. Generally, money market account and savings account yields at online banks go in the same direction as the federal funds rate.
“We’re not going to be pushing substantively higher with the Fed on the sidelines,” McBride says.
Bankrate’s 2021 forecast
McBride expects the top yielding, nationally available savings accounts and money market accounts to be around 0.75 percent annual percentage yield (APY) toward the end of 2021. That would be about nine basis points (0.09) higher than what the top savings account yield was toward the end of 2020.
“But net, net, we’ll likely end the year pretty close to where we are now,” McBride says. “And the reasoning behind that is, the economic weakness due to the pandemic particularly in the first quarter of 2021, likely leading to lower rates. But a strong snap-back in economic activity in the back half of 2021 as vaccines have reached mass distribution could bring about a little bit of a recovery in those yields. But again, that would only be recovering what was lost in the first half of the year.”
What happened to rates in 2020
The year started out normal: The Federal Reserve did not change rates on Jan. 29, 2020. Remember, the Fed had planned to keep rates steady in 2020. But that quickly changed.
A few weeks before the Fed’s scheduled March 17-18, 2020 meeting, the Fed made two unscheduled rate cuts due to the coronavirus.
- On March 3, 2020, the Fed lowered the federal funds rate to a range of 1-1.25 percent — cutting rates by 50 basis points.
- On March 15, 2020, (yes, that’s a Sunday), the Fed cut the federal funds rate to a target range of 0-0.25 percent — lowering rates to near zero with a 100 basis point cut.
As a consequence, rates on savings and money market accounts continued to drop throughout 2020.
What will drive rates in 2021
With the Fed not expecting to raise rates for several years, savers will likely need to wait until banks actually need deposits again before yields on savings and money market accounts increase.
“Banks want deposits if they can lend against them,” says Adam Stockton, director of consumer pricing at Novantas. “That’s ultimately how they make money.”
More lending may create a demand for deposits again, at some point.
“Loan growth has not been zero this year, but it has been kind of far slower than the amount of deposits that have come into the system through the government stimulus,” Stockton says. “And so… there aren’t enough opportunities [for banks] to lend the deposits that have come in.”
Stockton projects the top-yielding savings accounts and money market accounts will look much the same in December 2021 as they do now. As he sees it, it will probably take until late 2021, or more likely 2022 for upward movement in rates.