The Federal Reserve has recently decided to reduce interest rates for the first time since 2020, when an emergency rate cut was made at the onset of the COVID-19 pandemic. The benchmark federal funds rate was specifically decreased by 50 basis points, equating to a half percentage point.
In reaction to this adjustment, interest rates for high-yield savings accounts and certificates of deposit (CDs) offered by banks are likely to see a modest decline. For instance, a bank currently offering a 4.5% annual percentage yield (APY) on a high-yield savings account might reduce this rate to around 4%.
It is important for consumers to understand that this recent rate cut by the Federal Reserve is anticipated to be the initial move in a series of rate reductions expected to continue over the next year or more. This trend is likely to have notable implications for interest rates on savings accounts and CDs.
As part of this rate-cutting cycle, the Federal Reserve has adjusted the target range on the federal funds rate by 50 basis points (0.50%), setting it within a range of 4.75% to 5%. This change highlights considerable potential for further rate decreases.
In conjunction with the rate cut decision, the Federal Reserve released projections for the future. The projections indicate that rates may decrease by an additional 50 basis points by the end of 2024 and by another 100 basis points (1%) by the end of 2025. This points to an expectation that interest rates will be two full percentage points lower by the end of next year compared to their recent levels.
Savings account and CD interest rates typically do not depend directly on the Federal Reserve’s actions, but they tend to move in the same direction. As the Federal Reserve continues to lower rates, it is reasonable to expect that high-yield savings interest rates offered by leading online banks will also decline by a similar amount.
Short-term CDs, usually with terms of up to 18 months, tend to closely track the Federal Reserve’s interest rate adjustments. Conversely, longer-term CDs often base their rates on future interest rate expectations, which have not changed significantly. Therefore, while the interest rates on longer-term CDs might decrease, the reduction is likely to be less pronounced than it is for short-term CDs.
In light of these developments, individuals may need to consider their financial strategies. Those who do not need immediate access to their savings might find it prudent to open a CD to lock in current interest rates for a specified period. Additionally, starting a CD ladder could be advantageous while short-term CD rates remain relatively high.
For individuals with current investments in CDs, reallocating some funds to higher-potential investments, such as stocks or exchange-traded funds (ETFs), through a brokerage account might be a wise move to offset potential future declines in CD rates.
Ultimately, there is no single perfect solution to the challenge of falling CD and savings account interest rates. However, there is no need to rush decision-making. While interest rates are projected to decrease significantly, these changes are expected to occur over an extended period, allowing time for careful financial planning.
