What the Fed’s December Rate Decision Means for Savings and CDs (2024)

With the Federal Reserve leaving interest rates unchanged this week, it’s looking more and more likely that the central bank is done raising rates and will instead start cutting them next year. And that means interest rates on bank savings accounts and certificates of deposit probably have nowhere to go but down.

“Right now, more than likely, is the peak of interest rates,” says Phil Blancato, chief market strategist for wealth management company Osaic. And that means savers will have to think a little more carefully about where to park their excess cash.

The Fed’s stance has shifted dramatically in the past several months as inflation worries eased. All the same, officials appear to remain committed to keeping rates higher for longer than many on Wall Street would like.

The central bank started raising the benchmark federal-funds rate in March of 2022, when it was around zero. By July 2023, the Fed’s “target rate” had risen to between 5.25% and 5.5%, its highest level in more than two decades. Banks, which for years paid next to nothing on deposit accounts, gradually raised their rates in response.

Fed officials met again on Dec. 12 and 13 and announced they would hold rates steady, at least for the next several weeks. It’s the third straight time the central bank passed on the option of raising rates after doing so 11 times starting in March of 2022 . At the same time, Fed officials hinted Wednesday that as many as three interest rate cuts could be in store during 2024.

The fed-funds futures market—which allows investors to bet on future interest rates—now indicates that the central bank could start lowering its target rate as early as March, and end 2024 more than a full percentage point lower.

With inflation coming under control, a pattern of gradual cuts is the most likely scenario, many Fed watchers say.

But no one can predict the future with certainty. In another scenario, serious economic problems could force the Fed to cut rates more aggressively. This could happen if the central bank’s interest-rate medicine ultimately proves too potent, driving prices down and causing a spike in unemployment.

The case for CDs

If you’re a saver, all these variables mean you might have to think a little more carefully about the best place to keep your cash. Savings-account and CD yields topped 5% in 2023 for the first time in decades. And while the most generous banks still pay that much, those rates can be expected to quickly fall in line with the Fed’s rate cuts.

Committing your cash to a CD before rates decline is one solution. “This is your chance to go out and buy that one-year, two-year or even five-year CD,” says Blancato. “You don’t want to fall asleep at the wheel here.”

The best one-year certificates currently pay 6% or more. Rates generally fall with longer maturities, but some banks are paying 5.2% to 5.4% on their five-year CDs, which is well above the rate of inflation.

Of course, you should never lock up cash that you might need before a CD matures. Even if you only withdraw part of your money early, you’ll pay a penalty that will erase interest earnings and possibly some principal. “If people lock up too much and then the car dies, or they have to repair the roof, they won’t have the cash ready,” says Gail Reid, a financial advisor in Glendale, Calif.

Savings account rates remain strong—for now

That brings us to savings accounts. Banks like Popular Direct (5.4%) and BrioDirect (5.35%) still pay above 5% and will let you take your money out anytime. The catch, of course, is that banks can change their savings account rates at any time. When the Fed starts to cut rates, savers who want to earn the most interest will have to shop around. “Just as rates increased unevenly across different banks, some banks will decrease rates faster than others,” explains Adam Stockton, head of retail deposits at research firm Curinos.

Ultimately, it’s up to you to weigh the trade-off between CDs’ rate certainty and savings accounts’ easy access to your money. If you like CDs’ higher rates but worry about the lockup period, consider a CD ladder. With CD laddering, you divide your cash among accounts with varying maturity dates—three, six, nine and 12 months, for example. Every three months you’ll have the cash from a maturing CD to either reinvest or spend on that car or roof repair.

Treasury bills are an additional option. One-year Treasury bills are yielding a hair under 5%, and as long as you hold them to maturity, you’ll get all your principal back along with interest. Note that Treasurys trade daily in the bond market, so if you need to sell before maturity, you may fetch a different price than you paid. The good news is that if you sell when interest rates are falling, you may make a profit. Prices of existing bonds tend to rise when rates fall because newly issued ones pay less.

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