Kiss 5% CD Rates Goodbye When the Fed Cuts Rates at the End of 2024

Savers have benefited from investing in a certificate of deposit (CD) over the past couple of years. Many CDs currently pay 5% yields, making them a fantastic place to store money with a near-guaranteed return.

However, the Federal Reserve estimates it'll cut the federal funds rate once later this year and make multiple cuts next year, which could dramatically lower CD yields.

Here's how rate cuts could affect CDs and what to do about it.

How a rate cut could affect CD rates

The good news is that if you have money in a CD, a Fed rate cut won't impact your current CD rate. CD rates are fixed for your entire term.

Our Picks for the Best High-Yield Savings Accounts of 2024

Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of June 29, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings Member FDIC.	APY 4.25% Rate info 4.25% annual percentage yield as of June 29, 2024	Min. to earn $1
Citizens Access® Savings APY 4.50% Min. to earn $0.01 Open Account for Citizens Access® Savings Member FDIC.	APY 4.50%	Min. to earn $0.01

For example, if you open a 5% CD with a 2-year term tomorrow, you're nearly guaranteed to earn that interest rate on the amount you've deposited. The only way you wouldn't earn the 5% rate is if you take your money out early. In that case, you may pay a penalty fee of 90 days to 180 days of simple interest, reducing your CD interest rate.

But if the Fed cuts interest rates soon, yields for new CDs will likely fall. Policymakers estimate they could make one 25 basis point (0.25%) rate cut this year, potentially pushing CD rates down by as much by the end of 2024.

And with four potential cuts next year, CD rates could drop by a total of 1.25 percentage points by the end of 2025. This means 5% CD rates could soon be a thing of the past, replaced by rates no higher than 3.75%.

What you should do now

Depending on your financial needs, there are two steps to consider before interest rates fall. Here are a few suggestions.

1. Do nothing

This is the best approach if you currently have money in a CD. There's nothing you need to change, and there is no decision to be made if the Fed cuts interest rates. Leave your money in the account, and you'll earn the guaranteed rate you were promised when you opened it.

2. Open a new CD before rates go down

If you want to earn a nearly risk-free 5% yield on your money, it might pay to open a CD soon. There could be multiple rate cuts before the end of next year.

This means that 5% CD rates could disappear. So, if you have money you really want to put into a CD, now is the time to do it.

There's nothing wrong with waiting a little longer to put your money into a CD. Just know that you'll probably get a lower rate than what's currently available.

Don't forget this

While many CDs offer high yields, they aren't great places to store cash you might need soon.

You have to commit your money to being locked up for a period or pay a penalty to take it out early. Some no-penalty CDs exist, but they usually pay lower interest rates and can be harder to find.

Before opening the CD, ensure you don't need the cash for upcoming purchases or emergencies. If you think you'll need it, put it into a high-yield savings account for easy access.