Interest rates have a floor, and it's not zero
Interest rates cannot go below zero in any practical sense for regular savers. Banks need to make money on deposits—they lend out what you deposit and keep the difference as profit. If rates went negative, banks would be paying you to take your money, which defeats the purpose of a savings account.
The real floor is close to zero. The Federal Reserve, which sets the baseline rate that all other rates follow, can lower its rate to near zero but not below it. When the Fed did this in 2008 and again in 2020, savings rates dropped to 0.01% or lower at most banks. That's the practical bottom: rates that are so small they round to zero on your statement.
How low rates actually go depends on what the Federal Reserve decides about inflation and the economy. The Fed raises rates when inflation is too high and lowers them when the economy is weak. There's no set rule for how low they'll go—it depends on economic conditions at the time.
Key Takeaways
- Interest rates cannot go below zero because banks need to earn money on deposits to stay in business.
- The Federal Reserve controls the baseline rate, and it can lower rates to near zero but not below it.
- How low rates go depends on inflation and economic conditions, not on a fixed formula or schedule.
- When rates are very low, the difference between banks matters more—some offer 0.01% while others offer nothing.
- Rates can stay low for months or years, so comparing accounts now rather than waiting is usually the better choice.
Why the Federal Reserve controls the floor
The Federal Reserve is the central bank of the United States, and it sets a target rate called the federal funds rate. This is the interest rate that banks charge each other for overnight loans. Every other interest rate in the economy—what you earn on savings, what you pay on a mortgage, what credit cards charge—moves up and down based on what the Fed does.
When the Fed lowers its rate, banks have less incentive to offer high rates to savers because they're borrowing money from each other more cheaply. When the Fed raises its rate, banks compete harder for deposits because borrowing is more expensive. The Fed can't force banks to offer any specific rate, but it sets the conditions that make certain rates possible or impossible.
The Fed meets eight times a year to decide whether to raise, lower, or hold its rate steady. These decisions are based on two main things: how fast prices are rising (inflation) and how many people have jobs (employment). If inflation is high, the Fed raises rates to cool down spending. If unemployment is high, the Fed lowers rates to encourage borrowing and spending.
What happens when rates hit near-zero
When rates approach zero, savers earn almost nothing on their money. A $10,000 deposit earning 0.01% per year generates about $1 in interest. This happened from 2008 to 2015 and again from 2020 to 2021. During these periods, the only reason to keep money in a savings account was safety, not growth.
Banks still compete even at near-zero rates, but the differences become tiny. One bank might offer 0.01% while another offers nothing. Over a year, that's a difference of $1 on $10,000—not worth moving your money for. The real competition shifts to other features: no monthly fees, no minimum balance, easy access to your money.
When rates are this low, some people move money into other places like money market funds or short-term bonds, which might offer slightly higher returns. Others simply accept the low rate as the cost of keeping their emergency fund safe and accessible. There's no way to "beat" near-zero rates without taking on risk.
How long rates stay low varies widely
There's no way to predict how long low rates will last. After the 2008 financial crisis, rates stayed near zero for seven years. After the 2020 pandemic, they stayed low for about eighteen months before the Fed started raising them again in 2022. The timing depends entirely on how the economy recovers.
Some people wait for rates to rise before opening a savings account, thinking they'll get a better deal later. This usually backfires. Rates can stay low for years, and in the meantime, you're earning nothing on money you could have deposited earlier. A 4% rate today beats waiting two years for a 5% rate that may never come.
The Fed doesn't announce in advance how low it will go or how long it will stay there. It makes decisions based on current economic data, not on a predetermined plan. This means you can't time the market—you can only decide whether the current rate is worth using now.
The difference between Fed rates and what you actually earn
The federal funds rate is not the same as the rate you earn on a savings account. The Fed's rate is what banks pay each other. Your rate is what a bank pays you, and it's always lower because the bank keeps the difference as profit.
When the Fed's rate is 5%, a high-yield savings account might offer 4.5% to 5%. When the Fed's rate is near zero, savings accounts offer 0.01% to 0.5%. Banks pass along some of the Fed's changes but not all of them. They also consider how much competition they face from other banks and how much they need deposits at that moment.
This is why shopping around matters. When rates are low, the spread between banks widens. One bank might offer 0.01% while another offers 0.5%—a fifty-fold difference. When rates are high, most banks cluster closer together because they all need deposits badly. Low-rate environments reward comparison shopping more than high-rate ones do.
What you can control when rates are low
You can't control what the Federal Reserve does, but you can control where you keep your money. When rates are low across the board, focus on finding the bank offering the highest rate available, even if it's tiny. You can also reduce fees, which matter more when interest earnings are small.
A bank charging a $10 monthly maintenance fee wipes out years of interest on a small account. When rates are low, a no-fee account earning 0.5% beats a fee-charging account earning 1%. Read the fine print for monthly charges, minimum balance requirements, and withdrawal limits.
You can also split your money across different account types. A high-yield savings account earns more than a regular savings account. A money market account sometimes earns more than either, though it may have higher minimums. A certificate of deposit (CD) locks your money away for a set time but usually pays more than a savings account. None of these will make you rich when rates are low, but they're the tools available to you.
Frequently Asked Questions
Can interest rates go negative?
Not in the United States for consumer accounts. Some countries have tried negative rates, but banks in the U.S. would simply stop offering savings accounts rather than pay you to deposit money. The practical floor is near zero, around 0.01%.
How do I know if rates are about to drop?
You don't. The Federal Reserve doesn't announce rate changes in advance. You can watch Fed announcements and economic news, but even experts disagree on what will happen next. The safest approach is to use the current rate rather than wait for a better one.
Should I wait for rates to go up before opening an account?
No. Rates can stay low for years, and you'll earn nothing in the meantime. If you have money to save, opening an account now at the current rate is better than waiting. You can always move your money to a higher-rate account later if rates rise.
Why do some banks offer higher rates than others when the Fed rate is the same?
Banks set their own rates based on how much they need deposits and how much competition they face. Online banks often offer higher rates than brick-and-mortar banks because they have lower costs. Banks also adjust rates at different times, so shopping around always reveals differences.
What's the difference between the Fed rate and my savings account rate?
The Fed rate is what banks pay each other for overnight loans. Your savings rate is what a bank pays you, and it's always lower because the bank keeps the difference as profit. When the Fed rate changes, your rate usually changes too, but not by the same amount.