The Fed May Be Done Raising Rates. Here’s What It Means for CDs and Savings Accounts (2024)

Interest rates are still rising, and that’s good news for savers. But today’s rates may not be around for long. So, if you don’t need immediate access to your savings, it may make sense to lock in current interest rates with a CD.

Fed officials raised short-term interest rates by 0.25% on Wednesday, the latest in a series of hikes that has rewarded savers with the highest yields in many years. At the same time, the central bank hinted it may pause further rate increases going forward.

Many on Wall Street believe the Fed may even begin to dial back short-term rates later this year. For savers, that means the most generous rates could soon become harder to find. “I don’t think rates are going to stay this high,” says Sander Read, an investment advisor in Winter Park, Fla. “I wouldn’t wait to lock them in.”

The Fed’s rate hike was its 10th since March of 2022. Seeking to rein in high inflation, the central bank has increased the key federal-funds rate from next to nothing to between 5% and 5.25% over that span.

Why would the Fed turn to rate cuts? For one thing, the rate of inflation has slowed, from a high of 9.1% in June 2022 to 4.98% in March. And while the pace of price increases remains well above the Fed’s preferred level of 2%, the central bank fears that raising interest rates any more could tip the fragile economy into recession.

Where CD and Savings rates are headed next

That recession worry is why the market is betting that fed-funds rate, which banks consult when setting consumer rates, will soon fall. Based on the market for fed-funds futures—when people can bet on future interest rates—investors expect the benchmark fed-funds rate to drop to 4.37% by the end of this year, then to 3.54% by mid-2024 and 3.13% by the end of 2024.

Banks are already adjusting the rates they pay to customers accordingly. As recently as early April, the most generous were offering above-5% yields on one-, three- and five-year CDs. While it’s still possible to find such yields for one-year CDs, the three-year and five-year rates have slid to 4.5% and lower. Known as an inverted yield curve, it’s unusual for shorter-term CDs to pay more than longer terms. The likely explanation is that banks expect interest rates to decrease and don’t want to be locked into paying higher rates for extended periods of time.

Where to put your cash now

Still, even those decreased yields are nothing to sniff at, especially after years where virtually all banks paid savers next to nothing.

If you’ve got a few thousand dollars you’re likely to need in the next few months, a high-yielding savings account paying more than 4% could be a fine place for it. You won’t lose much to inflation, and you’ll be able to tap your money right away to pay that tuition bill or make a down payment on a house.

If you don’t need your cash for a while, you’ll typically earn more with CDs: Banks pay a little extra for the privilege of locking your money up. If the market is right and interest rates slide significantly, opening a CD will make you feel smart because you’ll be earning a percentage point or two more on your cash.

Here’s the caveat: Nobody knows what the future holds. Inflation could conceivably heat up again. Even as price increases have fallen broadly, labor-cost inflation has stayed worryingly high. That’s important because rising labor costs are thought to push up prices of goods and services generally. In that scenario, the Fed would likely resume raising rates.

Don’t rule out bond funds

Such uncertainty is why financial advisor Scott Tiras, in Houston, is telling clients not to lock up their money in a CD for more than a year. It’s true that if CD rates are, say, 3% a couple of years from now, then a 4.5% yield will look very good. But Tiras thinks today’s savers would be better off with a bond ETF or mutual fund in that scenario: Unlike CDs, which only pay interest, bond-fund shares can also appreciate in price. And because falling interest rates tend to drive up bond prices, that’s what they’d likely do. “But if somebody doesn’t want to take any risks, a three-year CD would be an option,” Tiras adds.

If you want to balance liquidity with good yields, consider building a CD ladder. The strategy involves opening CDs with varying maturity dates, such as one, two and three years. As each CD matures, you can swap the proceeds into a new, longer-term CD. “One advantage is that if you need access to part of your money at some point, you’re more likely to have access to it without incurring any early-withdrawal penalties,” says Adam Stockton, director of retail deposits at research firm Curinos.

Keep in mind that the best yields are likely to be found at smaller, lesser-known banks, which currently have more of a need to attract deposits than big national ones. Given recent bank failures, make sure that your total deposits at any one institution fall within the Federal Deposit Insurance Corp.’s insurance thresholds—$250,000 per depositor, or $500,000 for a joint account.

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