Key takeaways
- The Fed held rates steady at its June meeting this week.
- Experts anticipate rate cuts later this year -- possibly as early as July.
- The sooner you open a high-yield savings account or CD, the greater your earning potential could be.
One of the rare perks of inflation is that it presents a great opportunity for savers. As the Federal Reserve raises interest rates to combat inflation, banks also raise rates on their savings accounts and certificates of deposit. That means your money can grow faster.
The top savings accounts currently earn up to 5.55% annual percentage yield, or APY, and top CDs offer up to 5.35% APY. The Fed’s latest rate pause means high APYs will stick around for a bit longer, but experts say we could see rate cuts as soon as next month. So, if you want to maximize your earning potential, now’s the time to open one of these accounts.
Here’s what you need to know about how the Fed’s latest decision affects savings rates and what that means for your money.
How the Fed’s decisions impact savings and CD rates
The federal funds rate determines how much it costs banks to borrow and lend money to each other. When the Fed raises this rate to fight inflation, banks tend to raise rates on consumer products -- including savings accounts and CDs -- to boost their cash flow and remain competitive. When the Fed cuts this rate, banks usually follow suit.
From March 2022 to July 2023, the Fed raised the federal funds rate 11 times in an effort to tamp down record inflation, and deposit account rates skyrocketed. As inflation began to show signs of cooling, the Fed held rates steady at its next meeting -- and every meeting since then -- causing deposit account rates to plateau at the end of 2023.
Savings account rates have leveled out in recent months, remaining largely the same, but CD rates have gradually fallen. Why? Since CD rates are fixed when you open the account, banks may be hesitant to let you lock in a high APY if rate cuts are just around the corner.
Inflation is cooling, but not as fast as the Fed would like. The annual inflation rate was 3.4% in April, down from 3.5% in March, but it has a ways to go before it hits the 2% Fed’s target. Until it cools further, the Fed is likely to keep rates elevated.
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Where are CD and savings rates heading next?
At the beginning of this year, experts predicted three rate cuts in mid-to-late 2024. Now, many think it will be closer to two cuts. These cuts could start as early as next month, although most predict we won’t see them till the end of the year.
I believe CD rates will remain steady in the third quarter and will begin to decline in the fourth quarter as interest rates broadly fall from current levels. If there are cracks in the economy, such as higher unemployment rates, then interest rates and CD rates are likely to decline further.
Noah Damsky, CFA and Principal of Marina Wealth Advisors
What this means for your savings
Why should you care what the Fed does with interest rates? Because it affects how fast your money can grow.
Savings accounts and CDs earn compound interest. That means you earn interest on both your initial deposit and the interest you’ve earned so far. This can help grow your money exponentially, especially when rates are high -- for example, one CNET writer discovered she could double her savings in one year thanks to the power of compounding.
But timing makes a difference in how much you can earn. Because CD rates are fixed, opening a CD while APYs are high can maximize your earning potential and protect your earnings from anticipated rate cuts. So, if you have money saved that you won’t need for a few years, investing in a CD right now can help you earn a competitive, predictable return.
Savings account rates are variable, so they can change at any time. However, the sooner you open a high-yield savings account, the longer you can enjoy elevated rates and the greater your earning potential will be, even when rates eventually fall.
Regardless of the Fed’s next move, putting your money in a CD or high-yield savings account can always be a smart way to earn interest and reach your savings goals faster, whether you’re building your emergency fund or working toward a big purchase.
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FAQs
CD rate forecast: 2024
The Fed kept its rate the same after its fourth meeting of 2024 on June 11-12. Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on June 11.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Why shouldn't you invest all of your savings in a CD? ›
Inflation risk
Locking your money in fixed-rate CDs carries the danger that your money could lose its purchasing power over time if your interest gains are overtaken by inflation.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
Are CD rates going to go up or down? ›
Rates are expected to drop, so locking in the highest rate for as long as possible may be your best bet to maximize returns. However, you may not feel comfortable locking away your money for years on end. If that's the case, you may want to consider a CD ladder.
Should I lock in a CD now or wait? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Can I lose my money in a CD account? ›
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
Are CDs safe if the government defaults? ›
While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.
What happens to CDs if banks collapse? ›
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
What pays better than a CD? ›
High-yield savings accounts, money market accounts and bonds can be good alternatives to CDs. Returns vary, but they're all considered low-risk investments. Regardless of where you keep your money, tending to your credit health is always a top priority.
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
How much is too much to put in a CD? ›
Stay at or under $250,000. Ensure your CD deposit and the expected interest will total less than the $250,000 limit. Open CDs at different banks or credit unions. This approach might take more work, but you can utilize CDs at different rates and terms.
Are money CDs safe if the market crashes? ›
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
What can ruin a CD? ›
Harsher solvents such as acetone or benzene will dissolve the polycarbonate and thereby damage the disc beyond repair. Limited contact (cleaning) with mild solvents such as isopropyl alcohol or methanol is permitted, as these solvents evaporate quickly and will not dissolve the polycarbonate.
Can CDs be inherited? ›
Some CD accounts allow the owner to name a payable-on-death (POD) beneficiary. If the account owner dies, this person will automatically inherit the funds in a CD. These banks may terminate a CD when the account owner dies and allow the POD beneficiary immediate access to these funds.
What will CD rates be in 2025? ›
So if the Fed lowers its benchmark rate by 25 basis points, CD rates aren't guaranteed to fall from 5% to 4.75%. But all told, it's pretty fair to assume that there will still be opportunities to lock in a CD at close to 5% at the start of 2025.
How much will interest rates drop in 2024? ›
The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025. However, recent economic developments have led some forecasters to believe that rates will remain elevated at around 7% for the remainder of this year.
What is the interest prediction for 2024? ›
On 30 May 2024, the average 2 year fixed mortgage rate is 5.80%. While this is a significant drop from its July 2023 peak of 6.86%, it's still much higher than December 2021 when was 2.34%. Find out more in our guide to the Best mortgage rates.
Can you get 6% on a CD? ›
Right now, the only financial institution offering a 6% CD is Financial Partners Credit Union. To become a member of the credit union, you must live, work or go to school in Orange County, San Diego County, Riverside County, Los Angeles County, the city of South San Francisco or the city of Alameda.
