Although the fed funds rate remained unchanged in January, Fed Chairman Jerome Powell has previously stated the Fed’s focus on bringing inflation down to its target rate of 2%.
Getty ImagesOn Wednesday, the Federal Reserve once again held the benchmark funds rate steady, signaling that interest rate cuts were possible, but might not happen in the near future. BlackRock’s Rick Rieder noted that he think the cuts won’t happen in March, but could in May, MarketWatch reported today, and Bankrate’s chief financial analyst Greg McBride said in a statement today that: “The Federal Reserve is getting closer to the first interest rate cut, but we’re not there yet.”
Thanks in large part to a series of rate hikes since 2022, many of the highest-paying CDs have recently been paying APYs higher than we’ve seen in over a decade. (See some of the highest-paying CDs you may get now here.) But if the Fed cuts rates, you can expect to see less impressive certificates of deposit yields, pros tell MarketWatch Picks.
CD yields of all maturities will be susceptible to the Fed lowering interest rates, but at different times and likely by different magnitudes. “Yields on longer maturity CDs will decline well before the Fed actually starts cutting interest rates and returns on shorter term CDs will decline in closer concert with the Fed actually cutting interest rates,” says McBride.
And Ken Tumin, senior industry analyst at LendingTree, says: “When the Fed starts to lower its policy rate, there will likely be widespread declines of short-term CD rates. Fed rate cuts are likely to have less impact on long-term CDs, since these rates will have had significant declines leading up to the first rate cut.” Indeed, he adds, the economic conditions that result in Fed rate cuts such as falling inflation rates and weak job numbers often cause declines of long-term CD rates, even if the first Fed rate cut is months away. (See some of the highest paying savings accounts you can get now here.)
“Generally, short-term CD rates will see bigger movements related to the Fed lowering interest rates,” says Marcel Miu, a certified financial planner at Simplify Wealth Planning. “Fed interest rate policy changes impact the short end of the yield curve (yields that are less than one year) and that segment heavily influences short-term CD rates more than it impacts long-term CD rates.”
Already we’ve seen some changes in the CD market, says Daniel Carey, head of finance and accounting at Cambridge Savings Bank. “The market is anticipating a rate cut in 2024 which is why you have seen CD terms get shorter, allowing banks to reprice their CDs to match what the Fed may do,” Carey says. Indeed, some of the highest paying CDs now have very short terms like three months at 5.5%.
If you look back a few months, you’ll see that many short- and long-term CD rates have already been falling since November, likely with the expectation that interest rates will fall in 2024, says Tumin.
Of course nobody can say for certain exactly where rates are headed this year, but it’s safe to say that locking a higher rate in for a long-term CD might be more lucrative in the long run, given the economic forecast. “It really depends on the entire curve and how long the Fed is going to be lowering rates, not just how low,” says Lionel Poudevigne, head of deposit pricing and portfolio management at KeyBank.
While short-term CD rates are high today, we don’t know where they’ll be a year from now. “By locking in a long-term rate today, even if lower than today’s short-term rate, you’re guaranteed that rate for a longer time horizon, especially if there is risk of rates going down faster than previously predicted,” says Poudevigne.
Of course, other factors besides the Fed impact CD rates. “The other factor is what the competition is doing and if you happen to live in an area with many banks competing against each other, it can be advantageous as they keep rates higher to attract customers from their competitors,” says Carey.
