Here's exactly why the interest rate on your high-yield savings account keeps falling

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• Nearly all high-yield savings accounts decreased their interest rates in 2020.
• The Federal Reserve has lowered the federal funds rate in response to the coronavirus pandemic.
• Even with lower rates, high-yield savings accounts earn more than regular savings accounts.
• See Insider’s picks for the best high-yield savings accounts »

As of February 9, 2021, the best high-yield savings accounts pay 0.40% to 0.60% APY. If you’re earning considerably less than this, then you may want to consider switching.

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

Your bank isn’t the only institution dropping its rates — it’s happening at nearly all US banks right now.

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 lowered rates in response to the coronavirus pandemic. 

“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, told Business Insider.

As the coronavirus lingers in the US, industries are continuing to struggle and many businesses around the country are either remaining closed or operating at partial capacity. The Federal Reserve is trying to encourage Americans to borrow money by lowering rates. People might decide to get a mortgage or take out a personal loan while rates are low, which helps stimulate the economy.

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 said. In December 2018, the Federal Reserve increased its rate to 2.50%, and high-yield savings account rates jumped along with it.

The Fed expects rates to stay low through 2023, so your high-yield savings account rate will likely stay low for a while, and maybe even keep decreasing.

High-yield savings accounts are still useful

Since rates are low right now, should potential clients still bother opening a high-yield 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.

They’re also good tools for building an emergency fund — and emergency savings could be especially useful should you face a loss of income during the pandemic.

“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 0.04%, and savings accounts earn an average rate of 0.05%. 

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.

Get the latest coronavirus business & economic impact analysis from Business Insider Intelligence on how COVID-19 is affecting industries.

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