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Should you open a CD or savings account before the Fed cuts rates?

Compare your CD and savings account options closely to determine which is best for you ahead of a possible rate cut. Getty Images

All eyes will be on the Federal Reserve this week as they meet for the first time in 2024. 

After raising the benchmark interest rate to a range between 5.25% and 5.50% last summer — the highest it's been in decades — the Fed held steady and kept rates unchanged for the remainder of the year. They did so as inflation largely cooled, although the latest report did reflect a slight increase (and it is still above the Fed's target 2% goal). 

That all said, many economists are expecting rate cuts in 2024, if not in January then likely in the spring or early summer. This leads to a series of questions for borrowers and savers. For the latter group, it may be worth considering all alternatives. Specifically, is it worth opening a certificate of deposit (CD) or a high-yield savings account before the Fed cuts rates? That's what we'll break down below.

See how much you could be earning with a top CD rate here now.

Should you open a CD or savings account before the Fed cuts rates?

The answer to this financial question is personal. What can be beneficial for one saver may not be as advantageous for another. That said, there are some compelling reasons why you should open a CD instead of a savings account before the Fed cuts rates.

CD interest rates are locked for the entire term of the CD — whether that be nine months or 10 years. This is a major advantage in any climate, but especially now when the rates on these account types are expected to fall in tandem with the Fed's presumed rate cuts. Plus, if you're looking for the very best interest rate at the expense of some other features, CDs are the way to go as they're generally higher than popular alternatives like high-yield savings and even money market accounts

However, if you're not sure about your ability to keep the money in the account without withdrawing it early, a CD may not be the best option for you, regardless of any Fed activity. That's because you'll need to pay an early withdrawal penalty to access your funds again, potentially eliminating all of the interest you've earned on the CD to date.

Learn more about your CD options today.

Other considerations

While a CD is typically recommended for savers ahead of prospective interest rate cuts, it's not a one-size-fits-all approach. 

High-yield savings accounts, for example, have rates similar to CDs and, unlike their counterparts, will permit users to withdraw and add funds without penalty. That noted, high-yield savings accounts come with variable interest rates. So if you can get an account with a 4.5% APY right now — and the prevailing interest rate drops to 3.75% in a few months — your account will follow that trend. But that may be a valuable trade-off if it means keeping your funds accessible. 

You also don't need to make it a "one or the other" decision. There are numerous reasons why savers should open both account types in today's climate and that may be something worth investigating, too. What you shouldn't do, however, is just leave your money in a regular savings account. The average savings account rate is just 0.47% currently and will fall further when and if the Fed cuts rates. So that means you're essentially losing money by not making the switch to one or both of these other, higher-earning accounts now.

See how much you could earn with a high-yield savings account right here.

The bottom line

As the Federal Reserve approaches its first interest rate cut in years, savers should prepare themselves. There are valuable reasons to open a CD instead of a savings account before rates drop but there are equally compelling reasons to open a savings account instead (or both). Savers should also remember that even if rates do drop, they're unlikely to do so dramatically, making both account types valuable for both short- and long-term financial goals. 

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