Why Now Is Still a Good Time for 5% Savings Accounts -- Even if the Fed Cuts Rates

The never-ending drama over "when will the Fed cut interest rates" might finally be coming to an end. As of the Federal Reserve's latest meeting in June, officials indicated that they might make one interest rate cut of 25 basis points (0.25%) in 2024, with a possible four cuts (for a total of 1.00%) in 2025.

If the Fed is about to cut interest rates, does that mean you should open a CD? Or should you stick with the best savings accounts -- which as of today are still paying APYs of 5.00% and above?

Read on to see what the Fed's latest signals mean for your cash savings -- and a few reasons why the best savings accounts are still a smart move for your money.

No one knows when (or how much) the Fed will cut interest rates

Bank savings account APYs are variable -- they go up and down at any time based on the Fed's interest rate moves, and on each bank's decisions. If the Fed cuts interest rates, the APYs on bank savings accounts will go down, too. But if you open a CD today, you get that same fixed rate for the length of the CD's term -- so the best time to open a CD is right before the Fed cuts interest rates.

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 28, 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 28, 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

This means that if you could perfectly predict the future, and you knew exactly when the Fed would cut interest rates (and by how much), now might be a good time to open a CD. The best 1-year CDs are paying APYs over 5.00%. If interest rates get cut by a total of 1.25% between now and June 2025, you could lock in a higher yield today with the best CDs.

But here's the problem: no one knows exactly what will happen next. The Fed has previously signaled its intent to cut interest rates in 2024, but it keeps on…not cutting rates. The economy keeps humming along, creating lots of jobs. Prices have not fallen as fast or as far as the Fed wanted to accomplish by raising interest rates. If the Fed ends up leaving interest rates higher for longer, locking up your money in a 1-year CD (or longer-term CD) might not be the best move.

The best savings accounts keep your options open

Here's the biggest problem with opening a CD: you have to commit your money for a certain length of time, known as the CD's term. And if you need to take your money out, you have to pay early withdrawal penalties. CDs are inflexible in a way that savings accounts are not. The best savings accounts pay competitive APYs with the best CDs, and you don't have to lock up your money -- no savings account charges early withdrawal penalties.

The best savings account APY on our radar right now is 5.36%, offered by the Western Alliance Bank High-Yield Savings Premier account. Let's say you open a savings account with this bank, and later in 2024 (no one knows when) the Fed cuts interest rates by 0.25%. Let's say that the bank immediately reduces its APY by that same amount (0.25%).

Even after a possible Fed rate cut in 2024, you'd still be earning 5.11% APY on your savings. And you'd have complete freedom to use your money in whatever way you want, at any time -- without the hassles and penalties of a CD.

Is it worth locking up your money in a CD to gain a relatively small boost in your savings rate? Or would you rather just keep your money totally liquid and accessible in a savings account, or one of the best money market accounts? Sometimes freedom, flexibility, and convenience are worth paying for. Accepting the chance of a slightly lower rate on your savings can help you keep your options open.

Bottom line

Yes, it's true that the best CDs are paying APYs of 5.00% or more -- and if the Fed cuts interest rates, now could be a good time to lock in a CD at a higher rate. But no one knows how many interest rate cuts will actually happen in 2024 or 2025. If you want to keep your savings flexible and accessible, opening a high-yield savings account could be a better move. The best savings accounts give you a similarly high APY as the best CDs, but without early withdrawal penalties.