The Fed Cut Rates Again. Will Savings Account & CD APYs Continue to Drop?

As expected, the Federal Reserve cut interest rates by 25 basis points at its December meeting today, bringing them to a target range of 4.25% to 4.50%. While inflation has yet to reach the Fed's 2% target, the Fed expressed optimism in its post-meeting statement, saying that "economic activity has continued to expand at a solid pace."

For savers, the Fed's move is less promising. Annual percentage yields, or APYs, on CDs and savings accounts have plummeted since the Fed's September and November rate cuts, and experts believe the same is likely to happen this time around.

"In the coming months, a Fed rate cut would definitely affect CD and savings rates as each previous rate cut has," said Dana Menard, CFP, founder and lead financial planner at Twin Cities Wealth Strategies. "Shorter-term CDs and savings accounts will likely fall by the same amount as the cut, with longer-term CDs and rates also being reduced. It can be a good time to lock in longer-term rates before they get cut if you don't need access to the money during the term."

Here's what you need to know about how the Fed's latest decision affects your savings -- and what you should do to maximize your money now.

How the Federal Reserve influences deposit rates

The Fed meets eight times a year to assess the health of the US economy and vote on the federal funds rate, the rate banks use to lend and borrow money. While the Fed's decision to change rates doesn't directly affect savings rates, changes in APYs typically follow. The changes can take several weeks or even months to take effect.

Although some banks set their deposit account APYs according to the direction of the federal funds rate, timing and specific rates may vary. "Some big banks are swimming in deposits and they don't need to pay up to bring in more," said Greg McBride, chief financial analyst at Bankrate.

As such, there may be dramatic differences in account interest rates from bank to bank. "People should shop around, and they shouldn't just shop around today; they should shop around a week from now, a month from now and three months from now," said Gary Zimmerman, CEO of MaxMyInterest.

The Fed cut rates, now what?

Jordan Gilberti, certified financial planner and senior lead planner at Facet, recommends preparing for the worst-case scenario when thinking about strategies for growing your savings, whether you're setting aside cash for an emergency or building a sinking fund. Now that rates are beginning to dip, purchasing a CD or moving your money to a high-yield savings account as soon as possible is the best way to maximize your interest earnings.

You can also consider building a CD ladder, suggests John Buran, CEO of Flushing Financial, the parent company of Flushing Bank. This strategy allows you to take advantage of still-high interest rates in the short term but also lock in rates for the long term in case APYs continue to drop.

"While I never attempt to make predictions, I forsee quarterly rate cuts, as the Fed has stated it is looking to maintain its rate-cutting program over the next year," said Menard.

The best savings accounts to open now

Understanding the pros and cons of each deposit account type can help you make the best choice for your needs.

Traditional savings accounts

Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be convenient. These accounts often pay minimal interest on your savings. The average annual percentage yield for a traditional savings account is only 0.42%, according to the Federal Deposit Insurance Corporation.

Pros

• Traditional savings accounts are widely available at most financial institutions.
• Your money is easily accessible when you need it.
• If your account is held at an FDIC- or NCUA-insured institution, it's protected up to $250,000 per person, per institution.

Cons

• Interest rates are typically lower than the national average.
• Variable rates can change at any time.

High-yield savings account

A high-yield savings account is an interest-earning account often offered by online banks, credit unions or other financial service institutions. The best APYs available on high-yield savings accounts go up to 5%.

Pros

• Some high-yield savings accounts earn more than 11 times more than traditional savings accounts.
• Your money is easily accessible when you need it.
• If your account is held at an FDIC- or NCUA-insured institution, it's protected up to $250,000 per person, per institution if the institution fails.

Cons

• Availability can be limited. These accounts aren't offered by all banks or credit unions.
• Often available from online-only banks with no physical branches. You must be comfortable with a digital banking environment.
• Many accounts are provided by online-only banks with no physical branches. You must be comfortable with an entirely digital banking experience.
• Variable rates can change at any time.

Certificate of deposit

• A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time at a predetermined APY.
• Top CDs, for example, currently earn APYs as high as 4.70%.

Pros

• A fixed rate applies to the CD's entire term.
• CDs are widely available at most banks or credit unions.
• If your account is held at an FDIC- or NCUA-insured institution, it's protected up to $250,000 per person, per institution.

Cons

• Your money is tied up for the duration of the CD's term.
• Early withdrawal penalties reduce returns if you need to take out money before the term ends.

No-penalty CD

A no-penalty CD is a specialty CD that offers a fixed rate for a specific term, like traditional CDs. This deposit account doesn't impose an early withdrawal penalty if you need to access your money before the term ends. These CDs are generally less widely available, and the APYs are lower. The additional flexibility can be worth a slight drop in rates.

Pros

• A fixed rate applies to the CD's entire term.
• Withdrawals before the CD matures don't incur penalties.
• If your account is held at an FDIC- or NCUA-insured institution, it's protected up to $250,000 per person.

Cons

• No-penalty CDs aren't widely available at most banks or credit unions.
• These CDs generally earn a lower APY than a traditional CD.

Tips for finding the right savings account or CD

Keep in mind that larger, brand-name banks with bigger marketing budgets may not offer the most competitive rates on savings accounts and CDs. Community or regional banks, credit unions and online-only banks often offer higher rates on deposit accounts to attract new customers.

The best high-yield savings accounts continue to offer APYs up to 5%, low fees and no minimum balance requirements. The best CD rates are as high as 4.70% APY.

When evaluating a savings account, note any fees associated with opening or maintaining the account. CDs offer a safe, fixed rate of growth -- as long as you can leave the funds in the account until the maturity date to avoid early withdrawal penalties. Terms can last anywhere from three months to five years or more.

Additionally, confirm that your deposit is insured by either the FDIC (for banks) or the National Credit Union Administration (for credit unions). This protects your money for up to $250,000 per person, per institution if the bank fails. You should also compare APYs and how easily you can access your money before making your decision.

Elevated savings rates are still available

While we may see APYs continue to fall following the Fed's latest rate cut, there's still time to maximize your earnings with a high-yield savings account or CD. But the sooner you act, the better.

If you're not already earning a competitive interest rate on your savings, consider locking in one of today's best CD rates or moving your funds to a high-yield savings account to boost your earnings.

More on the Fed's rate cut:

• Today's Interest Rate Cut: How the Federal Reserve Affects Your Wallet
• Get Ready for Lower Savings Rates. Here's What Experts Say You Should Do Now
• Fed's Interest Rate Cut Comes as Expected, but Pace Could Slow in 2025