A Fed Rate Cut Is Likely Coming Next Month. Here's What It Means for Your CDs

The Federal Reserve slashed the federal funds rate for the first time in four years on Sept. 18, signaling the beginning of a rate cutting cycle that's likely to last into 2025. On its own, this doesn't mean much to the average consumer. The federal funds rate is just the interest rates banks charge other banks when lending money.

But most financial institutions also use it as a benchmark when setting rates on their consumer products. Bank accounts, including certificates of deposit (CDs), are usually indirectly affected. Here's what you can expect over the next few months.

Interest rates will keep dropping

When the Fed lowers the federal funds rate, banks usually drop their interest rates too. This is good news for borrowers in search of loans, but it's tough news for savers. The 5.00% APY CDs we've been enjoying over the last year or so are gone, with the best 1-year CD rates declining to somewhere between 4.00% and 4.75%. Those rates will fall further as we see more rate cuts from the Fed.

The Fed meets twice more in 2024 -- once in November and once in December. There's a good chance it cuts rates by another 25 basis points (0.25%) at its November meeting. This will trigger another drop in new CD rates. However, they probably won't fall by exactly 25 basis points. Banks still have some discretion in how much they charge customers.

Our Picks for the Best High-Yield Savings Accounts of 2024

Product	APY	Min. to Earn
American Express® High Yield Savings Member FDIC. APY 3.80% Rate info 3.80% annual percentage yield as of January 4, 2025. Terms apply. Min. to earn $0 Open Account for American Express® High Yield Savings On American Express's Secure Website. Member FDIC.	3.80% Rate info 3.80% annual percentage yield as of January 4, 2025. Terms apply.	$0	Open Account for American Express® High Yield Savings On American Express's Secure Website.
Capital One 360 Performance Savings Member FDIC. APY 3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.	$0	Open Account for Capital One 360 Performance Savings On Capital One's Secure Website.
Western Alliance Bank High-Yield Savings Premier Member FDIC. APY 4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website. Member FDIC.	4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	$500 to open, $0.01 for max APY	Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website.

What this means for your CDs

If you own an existing CD, you probably won't notice any difference. Most CDs lock in your rate for the entire CD term. This means you'll continue to earn whatever the APY was when you opened the account until the CD term ends. At that point, you may either take your cash or invest in a new CD at the current rate.

Those shopping for new CDs still have time to cash in on high rates, but it's best to do this before the next rate cut if possible. When choosing a CD, consider how long you're comfortable locking your money away. You can withdraw your money early, but doing so usually triggers a penalty, so you want to avoid this if you can.

Short-term CDs have offered some of the highest rates over the last few years, which isn't typical. We're now beginning to see a return to the traditional pattern, where long-term CDs offer higher APYs. This may not be true across all banks yet, though. 

What to consider before opening a CD

Locking in a long-term CD could be your best option for maximizing your earnings on your CD right now if you can swing it. If you opt for a short-term CD first, then by the time you're ready to open a long-term CD, rates will probably be much lower.

You may also want to consider not investing your money in a CD at all. These accounts require you to forgo access to your cash for months or even years, and that's not ideal in all situations. Plus, even when CD rates were at their peak, they were still lower than what many people earn investing in an index fund like the S&P 500 each year.

A high-yield savings account is a better choice for your emergency fund and short-term savings you plan to use within the next five years or so. Investing is generally the wiser play for long-term savings you don't expect to use anytime soon. It's also fine to spread your money between multiple accounts. Just make sure you understand the pros and cons of each so you can make the best decision.