Savings Rate Forecast for 2025: A Downward Trend Ahead?
Friday, Dec 20, 2024 2:36 pm ET
4min read As we approach the end of 2024, savers are wondering what the future holds for savings rates. The recent decisions by the Federal Reserve (the Fed) and the Bank of England, along with market expectations and geopolitical factors, provide valuable insights into the likely trajectory of savings rates in 2025. This article explores the key factors influencing savings rates and offers a prognosis for the coming years.
1. The Federal Reserve's Monetary Policy
The Fed's recent rate cuts and projections suggest a downward trend for savings rates in 2025. The Fed's benchmark rate, the federal funds rate, directly impacts consumer interest rates. As the federal funds rate decreases, banks and credit unions are likely to lower their savings and certificate of deposit (CD) rates. This trend is expected to continue, with most banks responding to the Fed's moves by lowering their rates.
2. The Role of Inflation
Inflation plays a crucial role in determining savings rates. In 2025, the Bank of England expects inflation to reach 2.75%. Bond market indicators suggest the Bank Rate will fall to around 4% by the end of 2025. Considering persistent inflation, real returns from cash are likely to fall in 2025.
3. Market Expectations and Geopolitical Factors
Based on the Fed's recent rate cuts and market expectations, savings rates are likely to continue their downward trend in 2025. According to the CME Group's FedWatch Tool, nearly 75% of fed funds futures traders predict another 0.25-point rate cut at the December 2024 meeting, with over three-quarters expecting a further reduction of 0.50 to 1.00 points by the end of 2025. Geopolitical factors, such as persistent inflation and global economic uncertainty, may also contribute to this trend. However, individual banks and credit unions may lower their rates even faster in anticipation of future Fed moves, further driving down savings rates.
In conclusion, the outlook for savings rates in 2025 appears to be a continuation of the downward trend seen in recent years. The Fed's monetary policy, persistent inflation, and market expectations all point to lower savings rates in the coming years. Savers should consider these factors when planning their financial strategies and may want to explore alternative investment options to maximize their returns.
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