Interest rates on top-yielding CDs are dropping. Here’s what that means for savers

Savers, take note: Your options for high-yielding certificates of deposit (CDs) are getting fewer by the day. What’s more, high-yield savings and money market accounts – variable rate deposit accounts that are prone to change in lock step with changes to the federal funds rate as set by the Federal Reserve – could see their yields drop following the central bank decision to further cut the federal funds rate.

Here’s what you need to know about how global financial markets and economic indicators can affect yields on deposit accounts such as CDs and high-yield savings, and how you should prepare for other future roadblocks in a declining rate environment.

What has happened in the financial markets as of late?

The Federal Reserve slashed the federal funds rate on Thursday by 25 basis points, or a quarter of a percentage point. Raising the federal funds rate has the indirect effect of boosting annual percentage yields (APYs) on deposit products like CDs and savings accounts. Conversely, lowering the federal funds rate will have the opposite effect.

We’ve already seen APY drops on deposit accounts promptly following the Fed’s first rate cut in September. For example, the yield on Vio Bank’s money market account, which had remained unchanged for some time, dropped 30 basis points since the Fed’s September rate cut.

Greg McBride, CFA, Bankrate chief financial analyst, says the amount of interest banks pay on savings and CDs at any point in time, is more a reflection of their need for deposits than anything else. “They don’t pay those returns out of benevolence,” McBride says, noting that those cutting rates more drastically likely have less of a thirst for deposits than those who continue to offer the most competitive returns. “As savers, we’re in a position to exploit that difference to our benefit,” McBride adds.

Where are yields headed among deposit accounts?

CDs

Expect CD yields to move generally in one direction: downward. “We’re on the downslope and that is going to accelerate once the Fed starts cutting interest rates,” McBride says. “So there is no benefit to waiting to lock in.”

If a CD with close to five percent APY is what you’re looking for, it’s still available. But that might not be the case for too much longer following the Fed’s second rate cut, especially with more cuts expected in the near future.

CD yields generally peaked at the end of 2023.

High-yield and traditional savings accounts

High-yield savings account yields might continue to decrease following more Fed rate cuts.

Unlike CDs, which typically have fixed-rate yields, the rates on savings accounts are generally variable, meaning they move in relation to the federal funds rate. One exception is a savings account with an introductory APY.

Yields for some traditional savings accounts might not move at all, especially those that haven’t increased their yields during the time the Fed’s raised rates 11 times starting in March 2022. For example, Chase’s Savings and Premier Savings accounts each have a standard rate of 0.01 percent APY.

Money market accounts

Money market accounts are a type of deposit account that sometimes combines features of both checking and savings accounts. Just like a savings account, money market yields might continue to trend downward following the Fed’s rate cut — and may tumble further if the Fed cuts rates again soon.

What’s ahead for 2024, and how should you prepare for possible headwinds?

Rates are poised to move lower and might move lower for some time. CDs allow you to lock in rate for a period, unlike savings deposit accounts which generally have variable yields. But they might not be for everybody.

For instance, a CD might not be a good option for people who are using cash in the near future or people who don’t have an emergency fund, which is usually kept in a savings account.

Those considering a CD should consider these questions:

• Will you need to withdraw the money during the CD’s term?
• Will the money you’re locking away in the CD earn a guaranteed APY?
• Do you have enough money available to ensure you won’t need to withdraw from the CD and pay an early withdrawal penalty?

If you feel that a CD is right for you, don’t wait, as it might lead to lower yields. “We’re at the tip of the iceberg,” McBride says. “We’re going to see reductions in yields on both CDs and liquid accounts. And that pace will accelerate in the months ahead as the Fed starts to cut rates.” A bank or credit union that changes its yield on your savings and/or money market account could make your APY no longer competitive. That’s why McBride says it’s a good idea to compare APYs when you receive your monthly statement.  “You’ve got to know where you stand and what else is available,” McBride says.

Bottom line

Even though rates are beginning to decrease after 29 months of a rising and prosperous rate environment for deposit accounts, it’s still a great time to save as top yields are still outpacing inflation. As long as you’re earning a yield that’s well above inflation then your money isn’t losing purchasing power.

–Bankrate’s Marcos Cabello contributed to updating this article.