It’s been a roller-coaster ride for rates during the past few years.
But after nearly three years of rate increases and then three rate cuts in the second half of 2019, rates are expected to resemble more of a lazy river in 2020.
That’s assuming one big thing — that the Fed sticks with its plan to leave rates alone in 2020.
“There’s not going to be much catalyst for change,” says Greg McBride, CFA, Bankrate chief financial analyst. “As long as the Fed is on the sidelines. And the outlook is that they will remain there.”
Will savings account rates increase in 2020?
At the start of 2020, competition will keep annual percentage yields (APYs) on savings accounts and money market accounts from falling further, McBride says.
“The longer the economic expansion continues, the more likely it will actually lead to seeing some higher yields, even with the Fed standing on the sidelines,” McBride says.
If the Fed’s stance changes, the trajectory of savings rates will change too, McBride says.
“Barring that, the continued economic expansion and a creeping higher of core inflation in the back half of the year will provide a little bit of a boost to savings yields late in 2020,” McBride says.
Banks could have more room to decrease APYs in 2020
Bankrate’s national average for money market accounts started 2019 yielding at 0.22 percent APY on Jan. 2, peaked at 0.25 percent APY in late April (holding steady into June) before ending 2019 at 0.21 percent APY.
The national average for savings accounts, on the other hand, only fluctuated from Jan. 2 to Jan. 9 when it increased from 0.09 percent APY to 0.1 percent APY. The Bankrate national average stayed at 0.1 percent APY for the rest of the year.
Many top-yielding savings accounts decreased APYs in anticipation of, or in response to Fed rate cuts. But generally they haven’t decreased a full 75 basis points, as the Fed did with three 25 basis point decreases between July 31 and Oct. 30 of 2019.
“So as we’ve looked across the board, there’s a pretty wide range in terms of some banks have probably only lowered 25 or 30 basis points, so far,” says Adam Stockton, director of consumer pricing at Novantas.
Stockton says there’s a set of banks that have decreased APYs 50 or 60 basis points. And there’s a set that have already lowered 75 basis points.
“I think given that, we wouldn’t be surprised to see some continued rate decreases moving forward,” Stockton says.
There are two reasons Stockton says that some banks haven’t decreased APYs the full 75 basis points. One is to keep their APYs competitive and the other is uncertainty in the market.
What will the top savings APYs look like in 2020?
Money market account and savings account yields on the absolute top-yielding nationally available accounts are expected to be around 2.25 percent APY, McBride says.
“There’s going to continue to be competition for consumers’ cash,” McBride says. “That’s really the lifeblood of financial institutions.”
This competition for consumers’ cash will remain heated with high-yield savings accounts clinging to 2 percent APY most of the year. A late-year burst will cause top-yielding savings account to rise to 2.25 percent APY, McBride says.
A top yield of 2.25 percent APY isn’t that bad for savers, considering before the Fed’s three rate cuts in 2019 top-yielding national rates were around 2.5 percent APY.
Top-yielding national rates doesn’t include credit unions that only have a certain field of membership and doesn’t include accounts that aren’t federally insured by either the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA), McBride says.
Could the Fed change its mind?
Ultimately it’s the path of the economy that’s going to dictate what happens with interest rates, McBride says.
“And as we saw in 2019, if there’s a threat of a slowdown the Fed can change stance and cut rates,” McBride says.
Inflation is another factor that the Fed will consider when determining its path in 2020.
“If inflation were to surge, the Fed could reverse course and start raising rates,” McBride says. “Barring either of those extremes, the likelihood is that the Fed’s work has been done. For now.”
Inflation ended 2019 below the Fed’s target rate of two percent.
A forecast uptick in inflation will push CD APYs up slightly in the final half of 2020. But this will be a hollow victory because when this happens, CD APYs will trail the change in inflation, McBride says.
Will CD APYs continue to be higher than savings accounts in 2020?
The markets will dictate which direction CD rates will go in.
If the market’s projecting rates are to fall further, CD rates could come down even more — to a point where they’re below savings account rates, Stockton says. If the market forecasts rate increases, that could lead to higher CD rates in 2020.
Now that the Fed has taken a stance of keeping rates steady for the near future, it might make it easier for banks to decrease rates. Generally, banks don’t want to keep making rate changes up and down, if possible, Stockton says.
What steps should savers consider taking in 2020?
It always pays for savers to prepare themselves for the possibility of future emergency expenses. This is especially true when times are good, like in the current economic expansion.
“With unemployment at a 50-year low and household income on the rise, now is the time to be making headway on accumulating a sufficient emergency cushion,” McBride says.
However, 28 percent of U.S. adults said they didn’t have any emergency savings, according to a Bankrate survey published in July 2019.
Savers can turn to a budget to make sure they know where their money is going. Maximizing retirement savings, especially if you’re employed, should also be a goal. Once you have your short-term emergency account funded, then you can start saving for other long-term goals. A CD, which usually features a fixed APY during its term, could be a good option for growing your savings in the new year and beyond.