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Savings account rates continue downward, even if the Fed rate isn't

Ethan Wolff-Mann
Senior Writer
The Fed might be holding steady, but savings rates aren't. (AP Photo/Richard Drew, File)

The Federal Reserve hasn’t cut interest rates since Oct. 30 and is holding rates steady — probably through 2020. But online savings rates continue to fall. 

Online savings bank Ally this week cut its rates again, bringing its interest rate down to 1.60%, noting the change in an email to account holders. The bank has over $119 billion in deposits as of the third quarter of 2019.

In June, savings rates at the leading online savings banks were generous. Marcus, from Goldman Sachs (GS), was paying 2.25%, Ally Bank (ALLY) was paying 2.20%, and a few others were paying even more.

At that time, it had been seven months since the Federal Reserve had hiked interest rates. The federal funds rate is a key factor for savings account rates, and Federal Reserve Open Market Committee had begun a campaign of hikes in 2015, bringing the target rate to between 2.25% and 2.50%. 

On July 31, the Federal Reserve announced a 0.25-point rate cut to 2.00% to 2.25%.

The cut was expected and banks had even pre-empted it. Ally had lowered its rate from 2.20% to 2.10% at the end of June, the first rate cut after 20 consecutive increases going all the way back to 2013.

The bank followed the first rate cut under Fed Chair Jerome Powell with another slash of the savings rate on Aug. 6, knocking off 0.20 percentage points. 

The Fed cut rates again on Sept. 26, and Ally lowered its interest rates further a week and a half after to 1.80%. The Fed lowered rates again a few weeks later, and Ally responded in mid-November, bringing it down to 1.70%.

There haven’t been any rates cuts since by the Fed, but savings banks’ rates could continue to fall. In the past, when Ally has lowered its rates, other banks have also lowered theirs. So far, Ally is the only popular online savings account that has lowered this latest round, but the industry often moves in lockstep. 

For example, after Ally lowered in mid-November, Barclays — another popular option— followed suit and knocked off 0.10 percentage points.

The reason why rates fall isn’t just about the Fed, however. Greg McBride, Bankrate’s Chief Financial Analyst, told Yahoo Finance that banks’ margin pressure, competition, and appetite for deposits could play a role.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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