Kiss 5% Savings Account Rates Goodbye When the Fed Cuts Rates

The past couple of years have been a great time for savers. Many online banks offer high-yield savings accounts with rates topping 5%.

But the savings party may soon be over. The Federal Reserve anticipates a cut to the federal funds rate later this year and multiple cuts next year. If those rate cuts happen, they'll undoubtedly lower savings account yields from their current highs.

Here's how the Fed's upcoming interest rate cuts could impact your savings account and what you can do to hold onto a sky-high rate.

A rate cut could affect your savings account

I once had a high-yield savings account that kept dropping the interest rate until the "high yield" in the high-yield savings account had mostly disappeared. That's because savings accounts have variable interest rates, which fluctuate based on market conditions and the federal funds rate.

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That's been a good thing for savers over the past couple of years as the Fed raised interest rates, causing the yield of many bank savings accounts to rise to stay competitive.

However, the Fed estimates it'll make one rate cut before the end of the year and up to four rate cuts next year. The group anticipates the total cuts will equal 125 basis points (1.25%) through 2025, which could mean savings yields could fall by about as much.

This is how fast savings rates could drop

You don't need to panic about your savings rate plummeting overnight. If and when the Fed makes rate cuts, it's expected to do so in 25 basis point (0.25%) increments and over the next 18 months or so.

Even when it does make an interest rate change, it usually takes several weeks or even a couple of months for the change to impact savings account yields.

It's not as if your interest rate will fall from 5% to nothing in a few weeks. You'll likely see your savings account yield slowly decline over time.

What you should do now

What you do with your savings right now depends on your goals. Here are a few ideas for what to do with your savings account if rates begin falling.

1. Leave it alone

The first thing you can do with your money is to leave it where it is. That's easy enough, right? This could be a good course of action for many savers, because high yields won't evaporate overnight.

If the Fed follows through on its estimated 125 basis points (1.25%) rate cuts over the next 18 months -- and you currently have a yield of 5% on your savings account -- you could still end up with a yield of about 3.75%. That's not a bad rate, but just know that lower yields are likely on the horizon.

2. Move it to a CD

The second option is to move your money into a certificate of deposit (CD) with a high yield. CD rates are fixed for the entire term, so locking in a 5% high-yield CD rate could help you maintain a high rate if that's your goal.

CD rates will fall when the Fed cuts rates, but when you put your money into a CD, the rate is guaranteed for the length of the CD. For example, if you put $3,000 into a 2-year CD with a yield of 5%, your interest rate won't fall even if the Fed cuts rates during that period.

But there are a few things you should know about CDs. The first is that once you put your money into a CD, you're supposed to keep it there. CDs aren't like savings accounts that you access when you need to. They're supposed to be a place where you park your money for a set period and don't touch it.

This leads us to the second thing you should know about CDs: If you take your money out early, you'll pay a penalty. The fee is usually 90 days of simple interest for CDs of two years or less or 180 days for CDs with longer terms. You can find no-penalty CDs, but they usually pay lower interest rates.

No matter what you decide to do with your money, the good news is that high interest rates won't disappear overnight. Even if you keep your money in a high-yield savings account, you'll likely be earning a pretty good return a year from now. Just keep in mind that lower rates across the board are around the corner, and move your money to a CD if you really need to maintain the highest yield.