Fed Rate Cuts Are Coming: Lock In Your High CD Rate Now

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Locking in your CD rates now is a smart move, before they drop across the board. Find out more here. [[{“value”:”

For the last few weeks, we’ve been hearing more and more chatter that the Federal Reserve is about ready to cut interest rates. That chatter is getting louder, and confidence is growing so strong that rates will soon be cut that it’s already starting to ripple through banking products like certificates of deposit (CDs).

Fortunately, you still have a little time before the Fed actually cuts rates to make a move from a high-yield savings account to a CD to lock in your rate for a little while longer.

Why does the Federal Reserve matter?

The Federal Reserve is in charge of monetary policy for the United States. This means monitoring the economy and making adjustments to the federal funds rate as necessary. This is the interest that banks pay each other when they lend money back and forth, so for banks, it amounts to the cost of doing business.

The problem is that the cost of doing business for a bank also trickles down to depositors, who also contribute money to the bank that it can use to do business — often at rates just at or below the federal funds rate. That’s best for banks, because if they use funds already deposited there, it’s generally a lot cheaper than getting it from elsewhere.

But as the federal funds rate drops, banks will be offering less and less interest to depositors. So that means that after the next meeting of the Federal Reserve, your high-yield savings account, for example, is likely to take a hit to the interest rate it’s been paying. It’s not a direct correlation, in that a 0.25% drop in the federal funds rate won’t necessarily result in a 0.25% loss to your savings account rate, but a drop is still a drop.

Why CD rates matter to savers

CD rates, unlike high-yield savings accounts, have fixed interest rates for the period in which they’re locked. CD terms can range from just a few days to many years, and the interest varies based on what banks expect interest rates to do during that period.

For example, most of the banks we monitor at The Ascent are offering the best interest rates for CDs that are locked from about six months to 18 months, depending on the bank. Longer-term CDs have lower rates, which generally signals that the bank is anticipating interest rates to continue to fall for some amount of time.

If you have money that’s just sitting on the sidelines, July was the best time to buy a long-term CD and lock your interest rate in, but if you didn’t do that, now is the second-best time, before rates drop lower. CME Group’s FedWatch tool predicts what the federal funds rate may do, and it is anticipating at least three 0.25% rate cuts before the end of the year.

What that means in real terms is that for every $10,000 you’ve sidelined in a savings account, you’re going to lose about $75 if you wait until January to lock in your interest rate, assuming it only drops by 0.75%. It might not sound like a lot, but that’s $75 in free money for doing almost nothing that you now won’t have.

What CD term should you choose?

This is harder to answer. Choosing a CD term length depends on a lot of factors, including:

How long you can sideline your cashWhat you think interest rates will do during the period your money is tied up in CDsYour overall financial snapshot

CDs can be purchased with term lengths up to 10 years at some banks, though many will only offer 5-year CDs at best. You’ll find those 60-month CDs have a pretty wide range of interest rates, depending on the bank, but the Federal Reserve Bank of St. Louis says that as of August 2024, they averaged about 3.97%. It’s a far cry from the 12-month CD that averaged 4.73% during that same period, but remember that you’ve got a rate that’s locked for five times as long.

Put another way, due to the way interest compounds on a CD, after five years at 3.97%, if you didn’t touch your interest gains, you’d have made $2,191.75 on your $10,000 CD — guaranteed. You’d have made just $483.39 on a 1-year CD at 4.73%, then you’d be at the whim of the market, which can make it very hard to plan long term. If interest rates drop, as banks seem to be predicting from the rates they’re offering for longer-term CDs, you’d have lost out, perhaps substantially.

Lock in your CD interest now, before the Fed meets

Unless you have a specific target in mind for your savings — for example, you’re holding on to money to buy your kid a car when they turn 16 or to pay for college — now is the time to lock your savings into a CD for as long as you can. Those 5-year CD numbers look pretty good right now, if you can part with your money for that long.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2026

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.

“}]] Read More