As widely anticipated, the Federal Reserve ended its September meeting announcing a cut to its benchmark federal funds rate, which likely signals the end of an era for savers who’ve been earning more thanks to higher interest rates.
The central bank cut its target rate by 25 basis points to 5.0% to 5.25%. While a quarter of a percent won’t likely make a huge difference, the move is a good sign the Fed feels confident that the once red-hot economy can now handle a rate cut and potentially more.
“The Fed has done a good job in lowering inflation and the economy feels like it’s on solid footing,” said John Buran, CEO of Flushing Financial, the parent company of Flushing Bank. “As inflation declines, it’s natural for the Fed to lower interest rates. This is only the beginning of a potential rate-cutting cycle.”
The talk of rate cuts has been ongoing for some time. While rates on the best high-yield savings accounts and CDs currently remain elevated, the average annual percentage yield, or APY, for banks and credit unions tracked by CNET is now 4.80%, showing a slight downward trend over the summer.
That said, many banks and credit unions still offer APYs of 5% or more on deposit accounts. Here’s how the Fed’s latest decision affects you and your ability to maximize interest earnings on a savings fund.
The Fed meets eight times a year to assess the health of the US economy and vote on the federal funds rate, the rate banks use to lend and borrow money. While the Fed’s decision to change rates doesn’t directly affect savings rates, changes in APYs typically follow. The changes can take several weeks or even months to take effect.
Although some banks set their deposit account APYs according to the direction of the federal funds rate, timing and specific rates may vary. “Some big banks are swimming in deposits and they don’t need to pay up to bring in more,” said Greg McBride, chief financial analyst at Bankrate.
As such, there may be dramatic differences in account interest rates from bank to bank. “People should shop around, and they shouldn’t just shop around today; they should shop around a week from now, a month from now and three months from now,” said Gary Zimmerman, founder and CEO of MaxMyInterest.
Buran said that the market expects the Fed to cut the federal funds rate a total of 100 basis points (or 1%) by the end of 2024. However, those expectations may shift depending on the Fed’s latest decision and economic conditions.
For now, Buran suggested building a CD ladder to take advantage of still-high interest rates in the short term, but also locking in rates for the longterm in case the Fed continues to make cuts, as expected.
In time, we’ll better understand how this rate cut impacts the savings landscape.
For now, Jordan Gilberti, certified financial planner and senior lead planner at Facet, suggests preparing for the worst-case scenario when thinking about strategies for growing your savings, whether you’re setting aside cash for an emergency or building a sinking fund. Now that rates are beginning to dip, purchasing a CD or moving your money to a high-yield savings account as soon as possible is the best strategy for maximizing your interest earnings.
Understanding the pros and cons of each deposit account type can help you make the best choice for your needs.
Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be convenient. These accounts often pay minimal interest on your savings. The average annual percentage yield for a traditional savings account is only 0.46%, according to the FDIC.
Pros
Traditional savings accounts are widely available at most financial institutions.
Your money is easily accessible when you need it.
If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person, per institution.
Cons
Interest rates are typically lower than the national average.
Variable rates can change at any time.
A high-yield savings account is an interest-earning account often offered by online banks, credit unions or other financial service institutions. The best APYs available on high-yield savings accounts are more than 5%.
Pros
Some high-yield savings accounts earn more than 11 times more than traditional savings accounts.
Your money is easily accessible when you need it.
If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person, per institution if the institution fails.
Cons
Availability can be limited. These accounts aren’t offered by all banks or credit unions.
Often available from online-only banks with no physical branches. You must be comfortable with a digital banking environment.
Many accounts are provided by online-only banks with no physical branches. You must be comfortable with an entirely digital banking experience.
Variable rates can change at any time.
A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time at a predetermined APY.
Competitive one-year CDs, for example, currently earn APYs as high as 5%.
Pros
A fixed rate applies to the CD’s entire term.
CDs are widely available at most banks or credit unions.
If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person, per institution.
Cons
Your money is tied up for the duration of the CD’s term.
Early withdrawal penalties reduce returns if you need to take out money before the term ends.
A no-penalty CD is a specialty CD that offers a fixed rate for a specific term, like traditional CDs. This deposit account doesn’t impose an early withdrawal penalty if you need to access your money before the term ends. These CDs are generally less widely available, and the APYs are lower. The additional flexibility can be worth a slight drop in rates.
Pros
A fixed rate applies to the CD’s entire term.
Withdrawals before the CD matures don’t incur penalties.
If your account is held at an FDIC- or NCUA-insured institution, it’s protected up to $250,000 per person.
Cons
No-penalty CDs aren’t widely available at most banks or credit unions.
These CDs generally earn a lower APY than a traditional CD.
Keep in mind that larger, brand-name banks with bigger marketing budgets aren’t the only ones offering competitive rates on savings accounts and CDs. Community or regional banks, credit unions and online-only banks often offer higher rates on deposit accounts to attract new customers.
“[Savers] need to think carefully about which savings accounts or CDs [to open],” Baruch Silvermann, CEO of The Smart Investor, wrote in an email to CNET. “With such uncertainty, it may not be a good idea to tie up your money for a longer term. You are likely to want the flexibility to be able to move your money fairly freely when a better opportunity arises.”
“[If] you’re looking at CDs, concentrate on shorter terms, so you can reinvest or move your money when they mature. Alternatively, you could choose a longer-term CD if there is no withdrawal penalty,” Silvermann added.
The best high-yield savings accounts continue to offer APYs up to 5.30%, low fees and no minimum balance requirements. The best CD rates have settled slightly, but you can still lock in an APY as high as 5.00% on a one-year term.
When evaluating a savings account, note any fees associated with opening or maintaining the account. CDs offer a safe, fixed rate of growth -- as long as you can leave the funds in the account until the maturity date to avoid early withdrawal penalties. Terms can last anywhere from three months to five years or more.
Additionally, confirm that your deposit is insured by either the Federal Deposit Insurance Corp. (for banks) or the National Credit Union Administration (for credit unions). This protects your money for up to $250,000 per person, per institution if the bank fails. You should also compare APYs and how easily you can access your money before making your decision.