Lock in High Interest CDs Now Before the Fed Lowers Rates in September
KEY POINTS
- CD rates are up over 5,000% from even just a few years ago, but this may not last.
- You can still get long-term CDs at rates of over 4.50% if you shop around.
- This one simple move can turn into hundreds more dollars than if you choose to ride a decreasing high-yield savings account rate down to the bottom.
It's been almost a year since the Federal Reserve set the federal funds rate at 5.33%, and a lot of people have been chomping at the bit for it to start going back down toward rates that we've been far more used to -- except for savers, that is. Savers have benefitted remarkably from the increase in interest rates, with some CD rates up by over 5,000% in the last few years.
But there's a lot of chatter that when the Federal Reserve meets in September, the slide downward will begin. Although the rate reduction is unlikely to be as dramatic as some people really want, even a single step toward lowering interest rates will affect the rates that savings vehicles like certificates of deposit are willing to offer.
What happens to CDs when the Fed cuts rates?
Right now, CDs are paying pretty well, with some still offering APYs over 5.00% for terms up to about 12 months. Longer CDs have been floating in the 3.00% and 4.00% range for some time. This is often because the banks themselves anticipate an eventual rate drop and don't want to be locked in to higher interest if they can get away without doing so. It cuts into their bottom line, too.
And although average CD rates did drop in July, possibly influenced by rumors of a coming rate cut, the moves have been relatively small so far, according to the Federal Reserve Bank of St. Louis. I made a little chart to show what's going on.
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 December 28, 2024. Terms apply.
Min. to earn
$0
Open Account for American Express® High Yield Savings
On American Express's Secure Website. |
3.80%
Rate info
3.80% annual percentage yield as of December 28, 2024. 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. |
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
4.46%
Rate info
The annual percentage yield (APY) is accurate as of November 7, 2024 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. |
4.46%
Rate info
The annual percentage yield (APY) is accurate as of November 7, 2024 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. |
| January 2024 | February 2024 | March 2024 | April 2024 | May 2024 | June 2024 | July 2024 | |
|---|---|---|---|---|---|---|---|
| 12-Month CD | 5.16% | 4.73% | 5.01% | 5.03% | 5.25% | 5.25% | 5.21% |
| 24-Month CD | 4.73% | 4.27% | 4.64% | 4.59% | 5.04% | 5.04% | 4.94% |
| 36-Month CD | 4.48% | 4.05% | 4.43% | 4.40% | 4.87% | 4.87% | 4.75% |
| 60-Month CD | 4.31% | 3.91% | 4.26% | 4.21% | 4.72% | 4.72% | 4.56% |
The federal funds rate has been at 5.33% since August 2023, which has allowed CD rates to stay elevated, even if they have fluctuated a bit. The banks are still paying you less than they'd need to pay if they borrowed funds from other banks (that's what the federal funds rate is about), you're still making a nice return, everybody's happy.
But if the federal funds rate starts to drop, CD rates will also have to drop. This only applies to newly minted CDs, since existing ones are still bound to the interest rate that applied when you locked them in.
So, let's say you lock in a 5-year CD today at 4.56% and rates for that CD fall to 3.00% in two years, you still have three years at 1.56% (or more) above the going CD rate. The only time the new CD rate would apply to you would be when your CD contract expires and you open a new one.
How much money can you earn if you open a CD before rates change?
It's always hard to predict just how much the Federal Reserve will lower interest rates, and how banks will respond to that.
Although rates were much lower in 2019, this was the last time we saw a rate decrease in recent memory. The federal funds rate dropped from 2.40% to 1.55% before the recession that corresponded with the COVID-19 pandemic in early 2020, but so did all CD rates, with the 12-month falling from 0.60% to 0.50% from July to November of 2019 and the 60-month dropping from 1.15% to 0.98% in that same period.
Although the situation was a lot different, with the shorter-term CDs having lower interest rates than longer-term CDs, you can kind of see the drop in CD rates relative to the federal funds rate. There's no guarantee that's the ratio we'll see again, but it's reasonable to expect CD rates to be a percent or so below the federal funds rate.
So, let's see how we fare with $10,000 in a few different scenarios. First, the 60-month CD at 4.56%. Most CDs compound monthly, so at the end of five years, you'll have earned an extra $2,555.43 if you invest in that CD today and compound the interest.
However, if you start a 12-month CD every year for five years, with an interest rate that decreases by a half percent yearly, here's what you get instead. It amounts to a 7% loss of interest.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total | |
|---|---|---|---|---|---|---|
| Principal | $10,000 | $10,533.62 | $11,040.61 | $11,514.49 | $11,949.02 | |
| Interest | 5.21% | 4.71% | 4.21% | 3.71% | 3.21% | |
| Return | $533.62 | $506.99 | $473.88 | $434.53 | $426.22 | $2,375.24 |
Move on CDs before the Fed drops rates
If you've been considering a CD for your savings, now is the time to jump on that, before the Fed drops rates in September. In fact, use the spare cash in your savings account to get the longest CD with the best interest rate that you can find, since once rates fall, there's no telling how far they may go. We may not see CD rates in the 4.00% to 5.00% range again for a while.
Our Research Expert
Kristi Waterworth is a financial journalist located in the Missouri Ozarks. When she’s not writing about real estate or personal finance, she’s committing shenanigans with her four dogs.
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