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CDs vs. high-yield savings accounts: What to consider if the Fed cuts rates

The Federal Reserve could cut rates at some point later this year, and if it does, it could have a hefty impact on CD and high-yield savings account rates.  Getty Images

With the economy improving and inflation down quite a bit since its peak a few years ago, some experts think that the Federal Reserve could cut interest rates later on this year. Should that happen, rates on high-yield savings accounts and certificates of deposit (CDs) are likely to fall, too. Opinions on rate cuts in 2024 are mixed, however, as the inflation rate has ticked back up over the last couple of months. 

Still, if rate cuts do occur, they could have a big impact on these types of deposit accounts. Right now, the average regular savings account offers just 0.46%, but it's easy to find high-yield savings accounts offering rates that are 10 to 12 times higher than the rates offered on regular savings accounts. And, depending on the CD term, rates on CD accounts can be even higher than what's being offered on high-yield savings accounts. So a rate cut in the future could mean earning less on these types of accounts. 

But how far will these rates fall if the Fed makes that move? And will both types of accounts be affected similarly? 

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CDs vs. high-yield savings accounts: What to consider if the Fed cuts rates

Here's what you need to know — and which option you should focus on to be prepared if the Fed cuts rates.

The fall has already begun

The Fed has indicated over the last few months that rate cuts could be on the horizon. As such, some banks have already started adjusting savings rates in preparation.

"Savings account rates and CD rates have already started to fall just due to the expectation that the Fed will start cutting rates sometime this year," says Ken Tumin, president of bank review platform DepositAccounts. "The fall of online deposit rates in the first quarter of 2024 shows that banks will likely cut rates quickly when the Fed starts cutting."

Those cuts could be drawn out, too.

"Based on current data, it appears likely that the Fed will cut rates this year by one to three times at about 0.25% each time. It appears they have the ability to be patient, and history shows that the risks of moving too fast, especially when the labor market is holding at the target level and the economy is growing," Stacy Johnson, senior portfolio manager at TIAA in Minneapolis, explains.

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Lower savings account rates will be felt faster

Both savings account and CD rates will fall once the Fed starts making its moves, but experts say it's likely savings account rates will drop faster. This is because rates on these accounts are variable, and banks can implement them immediately with existing customers.

CD rates, on the other hand, are locked in for months or even years. Due to this, lower CD rates will only be felt for those opening new accounts — not those who already have CDs in place.

"High-yield savings accounts tend to be more responsive to changes in the Fed's rates because they are more closely tied to the short-term interest rates that the Fed influences," says Leslie Tayne, a financial attorney in New York. "CDs, particularly those with longer terms, might not immediately reflect rate cuts."

One locks in your rate longer

With rates poised to potentially fall on both CDs and savings accounts, understanding how the two differ will be critical if you're opening a new account. 

On CDs, you're guaranteed a fixed interest rate for the entire account term. It may be for one month or three months, or it could be for up to 10 years. For this reason, they may be better options now, as most experts see rate cuts on the horizon. 

"CD rates are likely to continue to fall this year," Tumin says. "So buying a CD as early as you can will keep you earning a relatively high rate well after the series of Fed rate cuts take place."

Savings accounts, on the other hand, have rates that shift often based on market conditions. This means you'll feel the brunt of rate cuts more quickly. 

The perk, however, is that you retain access to your money no matter what. Unlike CDs, there are no penalties for withdrawing funds at any point. 

"It's important to choose a CD that fits within your savings timeline and doesn't lock up your money for too long, otherwise you'll have to pay an early withdrawal penalty to get your money out sooner," Tayne says. "One strategy that can mitigate this risk is CD laddering, or spreading out your savings across multiple CDs with varying terms."

The bottom line

Rate cuts may coming at some point, but with rates as high as they are now, they should remain beneficial for any consumer looking to grow their wealth. Just keep in mind: The longer you wait, the more likely rates will fall, so if you're eyeing a CD or savings account, opening one now may be the best way to maximize your interest earned. You should also shop around for your account, as fees and rates vary from one bank to the next. In many cases, online banks offer the highest APYs, as they have lower overhead costs.

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