Savers are facing a shrinking landscape of high-yield certificate of deposit (CD) options as interest rates continue to decline. This trend follows the Federal Reserve’s recent decision to cut the federal funds rate by 25 basis points, a move that directly impacts the yields offered on various deposit accounts, including high-yield savings and money market accounts.
Key Takeaways
- CD yields are expected to continue their downward trend, making it advisable to lock in current rates rather than waiting for better offers.
- High-yield savings and money market account yields are variable and may also decrease, especially if the Federal Reserve implements further rate cuts.
- Despite the decline, top yields on deposit accounts are still outpacing inflation, meaning savers can still protect their purchasing power.
The Impact of Federal Reserve Rate Cuts
The Federal Reserve’s recent quarter-percentage-point reduction in the federal funds rate has a direct inverse effect on the annual percentage yields (APYs) of deposit products. While raising rates boosts APYs, lowering them typically leads to a decrease. This is not the first rate cut in recent times, following a period where rates were either increased or held steady.
Greg McBride, CFA, Bankrate’s chief financial analyst, explains that the interest rates banks offer on savings and CDs are primarily driven by their need for deposits. Banks that are cutting rates more aggressively likely have a lower demand for funds compared to those maintaining more competitive returns. Savers can leverage this difference to their advantage.
Where Deposit Account Yields Are Headed
Certificates of Deposit (CDs): CD yields are on a downward trajectory, and this trend is anticipated to persist. McBride advises savers not to delay in locking in current rates, as better offers are unlikely to emerge. While CDs offering around 4.50 percent APY are still available, this may change soon, especially with the possibility of further Fed rate cuts.
High-Yield and Traditional Savings Accounts: Yields on high-yield savings accounts are likely to decrease in line with further Fed rate cuts. Unlike the fixed rates of CDs, savings account rates are variable and can be adjusted by banks at any time. Some traditional savings accounts, particularly those that did not increase yields during previous Fed rate hikes, may see minimal changes, with some offering as low as 0.01 percent APY.
Money Market Accounts: Similar to savings accounts, money market accounts, which often blend checking and savings features, may also experience declining yields. These rates could fall further if the Federal Reserve continues to lower the federal funds rate.
Preparing for a Declining Rate Environment
With rates expected to move lower for the foreseeable future, CDs offer a way to secure a fixed yield for a specific term. However, CDs may not be suitable for everyone, particularly those who anticipate needing access to their funds in the short term or who lack an emergency fund, which should be kept in a liquid savings account.
Savers considering a CD should evaluate whether they will need to withdraw funds before the term ends and if the guaranteed APY justifies locking away the money. McBride reiterates that now is an opportune time to lock in CD yields that are likely to outpace inflation. While savings and money market rates are variable and will likely decline, the best-yielding accounts are still expected to remain above inflation.
McBride also suggests regularly comparing APYs on savings and money market accounts, as bank rates can change. Staying informed about available rates ensures savers can maintain competitive yields and protect their purchasing power.
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