What Could Fed Interest Rate Cuts Mean for Savings and CDs?

The Federal Reserve eyeing cuts could mean changes for savings accounts and certificates of deposit (CDs). While these macroeconomic shifts are designed to help control or reduce inflation and encourage economic growth by making it easier for the average person to borrow money, it also can have a direct ripple effect on personal finances, particularly savings accounts and CDs. Understanding these changes is the first step toward making smart, proactive money decisions. While rate fluctuations are beyond one person’s control, the strategy for managing them is not.

Savings Accounts

Interest rates on most kinds of savings accounts aren’t fixed, meaning they can fluctuate based on a variety of factors, including general economic trends and, most directly, decisions made by the Federal Reserve. When the Fed decreases rates, interest rates on savings accounts tend to decrease as well.

This means individual clients may see a lower annual percentage yield (APY) on the amount their savings account accrues over the course of the year. This impacts different types of saving accounts at different rates.

• Traditional savings accounts offer a great way to begin saving money outside of a checking account. While the APY is low, it’s still higher than leaving money in a checking account.
• High-yield savings accounts or money market accounts offer significantly higher rates than more traditional options. While these accounts will also see their APYs decrease following a Fed cut, they will almost certainly continue to offer a much better return than their traditional counterparts. Even with small, projected cuts, these FDIC-insured accounts remain a powerful tool for growing money safely.

Certificates of Deposit (CDs)

CDs operate differently. They offer a fixed interest rate for a specific term, which can range from a few months to several years. In exchange for this higher, guaranteed rate, clients agree not to withdraw the money until the CD “matures,” or its term ends.

Because the rate is fixed when the account opens, any current CDs are protected from future interest rate cuts. The locked-in rate will continue for the entire term.

This creates a strategic opportunity for savers. With anticipation of rates falling, now is a good time to lock in relatively higher rates through a new CD. If a CD is opened after the Fed makes cuts, the available rates will likely be lower than they are now. Acting before cuts are implemented can secure a better long-term return on cash as long as that money isn’t needed immediately.

Creating an Action Plan

Trying to perfectly time the market is a difficult game. Instead, focus on making the most of what through practical steps to prepare personal finances for a potential drop in interest rates.

• Assess current savings: If an emergency fund or short-term savings is sitting in a low-interest account, move it to a high-yield money markets account to maximize earnings, even in a falling rate environment.
• Consider locking in a CD rate: If there is a sum of money not needed for six months, a year or longer, consider opening a CD. Lock in competitive rates now before further cuts take effect to guarantee return for that period.
• Maintain a long-term perspective: Interest rates move in cycles. While they may be heading down now, they will eventually rise again. The most important factor for building wealth is not timing the market but consistently saving and investing over time.
• Don’t stop saving: The worst financial move is letting market uncertainty lead to inaction. Whether rates are high or low, it is always better off earning some interest than none at all. Money in a high-yield account or CD is actively working, unlike cash sitting in a checking account.

Ultimately, economic forecasts will always change, but the principles of sound financial management remain constant. A robust financial strategy begins with understanding how Federal Reserve policies affect savings and taking proactive steps to reach financial goals.

Not sure which savings product is right for you? Walk through our personalized products guide or visit one of our local offices to discover your best options today.