Are CDs Worth Buying Now That Rates Are Being Cut?

The Federal Reserve just lowered the federal funds rate for the first time since 2020. Although consumer interest rates don't have a direct relationship with the Fed's benchmark rates, they tend to move in the same direction over time. So, with CD rates likely to move lower immediately after the Fed's action, is it still a good idea to put money in a CD?

Here's a rundown of what you need to know about the Fed's rate cut, how it could affect CD interest rates, and whether CDs are still worth buying now.

Here's what the Fed just did

The Federal Reserve just cut the benchmark federal funds rate by 50 basis points, or half a percentage point. This is the first rate cut since early 2020, when the Fed made a massive emergency rate cut to near-zero levels due to the COVID-19 pandemic.

In response to soaring inflation in 2022, the Fed raised rates rather aggressively from near-zero to a target range of 5.25%-5.50%, where it stood from mid-2023 until this rate cut was made.

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There are some consumer interest rates (such as credit cards) that are directly dependent on the federal funds rate. But others -- including CD rates -- are set by the banks themselves and don't have to follow the Fed's moves exactly. And this is important for CD depositors to know.

How will CD rates be affected?

To be perfectly clear, nobody has a crystal ball that can predict what CD interest rates will be at any point in the future. But with that in mind, here's what I expect now that the Fed has officially started cutting rates.

For short-term CDs (with term lengths of 18 months or less), I would expect rates from high-yield CDs to roughly track the Fed's movements. But as mentioned, the Fed didn't cut rates dramatically all at once, so it's likely that the short-term CD rates being offered by the best online banks aren't that much lower than they were before the Fed's rate cut.

Long-term CDs tend to not follow the Fed's move as closely. Their rates have more to do with future expectations for interest rates, and these haven't changed much. In other words, experts were expecting gradual rate cuts over at least the next year or so prior to the Fed decision, and they are still expecting that.

So, while interest rates on longer-term CDs might gravitate lower, I wouldn't expect them to move sharply in response to the Fed's rate cut.

The Fed isn't likely to stop

One important point is that this is just the first rate cut in an expected rate-cutting cycle that is likely to last for over a year. Even the Federal Reserve Board members themselves foresee another 150 basis points (1.50%) in rate cuts by the end of 2025. So, interest rates on CDs and high-yield savings accounts are likely to keep falling.

The point is that it could still be a great time to buy CDs if you have cash on the sidelines that you aren't likely to need for a while. Even though CD interest rates aren't likely to be quite as high as you could have found a couple weeks ago, buying a CD could still be a great way to insulate your savings from future rate cuts.