You might have noticed your high-yield savings account interest rate falling, but it's only temporary

high yield savings account dropping

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  • High-yield savings accounts are tied to the federal funds rate.
  • The Federal Reserve has lowered the federal funds rate, so high-yield savings account rates are going down, too.
  • Even with lower rates, high-yield savings accounts earn more than checking and regular savings accounts, making them ideal places to store money for short-term savings goals, such as buying a home.
  • When the Federal Reserve increases rates down the road, your high-yield savings account rate should go up, too.
  • See Business Insider's picks for the best high-yield savings accounts »

If you have a high-yield savings account, you may have noticed your APR has decreased since you set up the account. 

Lower rates are discouraging. After all, the entire point of a high-yield savings account is that it earns more interest than checking accounts and regular savings accounts

Why are these accounts that are supposed to earn you more interest suddenly earning less than they used to? And how should you respond?

How high-yield savings account rates are determined

In the US, high-yield savings account rates are tied to the federal funds rate set by the Federal Reserve. The federal funds rate is the rate at which banks lend money to each other.

High-yield savings account rates are variable, meaning they change over time. Variable rates typically fluctuate along with the economy, or in this case, along with the federal funds rate.

If the federal funds rate increases, your high-yield savings account rate likely will, too. When the federal funds rate decreases, so does your rate. Even though your bank advertised, say, a 2% APY when you set up the account, that rate will go up or down after you've opened the account.

Why rates are going down

The Federal Reserve has already lowered rates twice in 2020. The most recent decrease was on March 15; the rate range fell to 0% to 0.25%. 

"The Federal Reserve's actions have certainly been influenced by the coronavirus and the impact on the economy and the perceived impact of what it will be on the economy," Edward Mahaffy, president of ClientFirst Wealth Management, tells Business Insider.

As the coronavirus spreads, industries are struggling and businesses around the US are closing. The Federal Reserve is trying to encourage Americans to borrow money by lowering its rate. 

Lower rates can be great news for people paying off credit cards and business loans with variable interest rates. But it's disappointing news for savers whose account rates are dropping.

This fluctuation is nothing new, though. "The same thing happened in reverse when the Fed started hiking rates back in the fourth quarter of 2018," Mahaffy says. In December 2018, the Federal Reserve increased its rate to 2.50%, and high-yield savings account rates jumped along with it.

When the Federal Reserve eventually hikes rates back up again, you should expect to see your account's APY increase, too. However, we have no way of knowing when that will happen.

High-yield savings accounts are still useful

Since rates are low right now, should potential clients still bother opening a high-yields savings account?

"Definitely," Mahaffy says. 

Unlike retirement accounts, high-yield savings accounts allow you to access your money quickly. This makes them ideal for savings goals that are a year or two down the road, such as buying a house.

"You're not as concerned about the interest rate there as you are about being able to access the money," he says. "As long as you're with a federally insured institution, then I would just go with the higher rate."

Neither current nor potential high-yield savings account clients should be deterred by current rates. Yes, it's frustrating that rates aren't as high as they were in December 2018. But you're still earning more interest than you would in a checking account or regular savings account - checking accounts earn an average rate of 0.06%, and savings accounts earn an average rate of 0.09%. 

You have the potential to earn around 10 to 15 times what you'd earn in a traditional savings account, even with these low rates. And when the Federal Reserve eventually increases rates again, you'll probably be happy you kept your money where it is.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

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