Key takeaways
- The Fed held rates steady at its June meeting this week.
- Experts anticipate rate cuts later this year -- possibly as early as July.
- The sooner you open a high-yield savings account or CD, the greater your earning potential could be.
One of the rare perks of inflation is that it presents a great opportunity for savers. As the Federal Reserve raises interest rates to combat inflation, banks also raise rates on their savings accounts and certificates of deposit. That means your money can grow faster.
The top savings accounts currently earn up to 5.55% annual percentage yield, or APY, and top CDs offer up to 5.35% APY. The Fed’s latest rate pause means high APYs will stick around for a bit longer, but experts say we could see rate cuts as soon as next month. So, if you want to maximize your earning potential, now’s the time to open one of these accounts.
Here’s what you need to know about how the Fed’s latest decision affects savings rates and what that means for your money.
How the Fed’s decisions impact savings and CD rates
The federal funds rate determines how much it costs banks to borrow and lend money to each other. When the Fed raises this rate to fight inflation, banks tend to raise rates on consumer products -- including savings accounts and CDs -- to boost their cash flow and remain competitive. When the Fed cuts this rate, banks usually follow suit.
From March 2022 to July 2023, the Fed raised the federal funds rate 11 times in an effort to tamp down record inflation, and deposit account rates skyrocketed. As inflation began to show signs of cooling, the Fed held rates steady at its next meeting -- and every meeting since then -- causing deposit account rates to plateau at the end of 2023.
Savings account rates have leveled out in recent months, remaining largely the same, but CD rates have gradually fallen. Why? Since CD rates are fixed when you open the account, banks may be hesitant to let you lock in a high APY if rate cuts are just around the corner.
Inflation is cooling, but not as fast as the Fed would like. The annual inflation rate was 3.4% in April, down from 3.5% in March, but it has a ways to go before it hits the 2% Fed’s target. Until it cools further, the Fed is likely to keep rates elevated.
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Where are CD and savings rates heading next?
At the beginning of this year, experts predicted three rate cuts in mid-to-late 2024. Now, many think it will be closer to two cuts. These cuts could start as early as next month, although most predict we won’t see them till the end of the year.
I believe CD rates will remain steady in the third quarter and will begin to decline in the fourth quarter as interest rates broadly fall from current levels. If there are cracks in the economy, such as higher unemployment rates, then interest rates and CD rates are likely to decline further.
Noah Damsky, CFA and Principal of Marina Wealth Advisors
What this means for your savings
Why should you care what the Fed does with interest rates? Because it affects how fast your money can grow.
Savings accounts and CDs earn compound interest. That means you earn interest on both your initial deposit and the interest you’ve earned so far. This can help grow your money exponentially, especially when rates are high -- for example, one CNET writer discovered she could double her savings in one year thanks to the power of compounding.
But timing makes a difference in how much you can earn. Because CD rates are fixed, opening a CD while APYs are high can maximize your earning potential and protect your earnings from anticipated rate cuts. So, if you have money saved that you won’t need for a few years, investing in a CD right now can help you earn a competitive, predictable return.
Savings account rates are variable, so they can change at any time. However, the sooner you open a high-yield savings account, the longer you can enjoy elevated rates and the greater your earning potential will be, even when rates eventually fall.
Regardless of the Fed’s next move, putting your money in a CD or high-yield savings account can always be a smart way to earn interest and reach your savings goals faster, whether you’re building your emergency fund or working toward a big purchase.
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FAQs
CD rate forecast: 2024
The Fed kept its rate the same after its fourth meeting of 2024 on June 11-12. Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on June 11.
Can you get 6% on a CD? ›
Right now, the only financial institution offering a 6% CD is Financial Partners Credit Union. To become a member of the credit union, you must live, work or go to school in Orange County, San Diego County, Riverside County, Los Angeles County, the city of South San Francisco or the city of Alameda.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 2.61% | $264.14 |
| 18 months | 2.22% | $338.29 |
| 2 years | 2.08% | $424.40 |
| 3 years | 1.95% | $601.95 |
3 more rowsJun 14, 2024
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Where can I get 7% interest on my money? ›
7% Interest Savings Accounts: What You Need To Know
- As of June 2024, no banks are offering 7% interest rates on savings accounts.
- Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Right now, there aren't any financial institutions offering 7% interest on a CD. Alpena Alcona Area Credit Union, a local financial institution in Michigan, previously offered a 7.19% APY on a 7-month CD special, but that offer has ended. There are a few financial institutions with CDs paying 6% APY or more, though.
Can I get 5% on a CD? ›
Minimum deposit to open: $500
Quontic Bank offers CDs with terms ranging from six months to 60 months (five years), and APYs range from 4.30% to 5.05%. While the six-months CD earns the highest APY at 5.05%, Quontic's one-Year CD earns 4.50% APY.
How much money do you make on a $5000 CD? ›
Today's top CD rates by term
| CD term | Institution offering top APY | Estimated earnings on $5,000 with top APY |
|---|
| 6-month | Popular Direct | $132 |
| 9-month | Forbright Bank | $197 |
| 1-year | CIBC Bank USA | $268 |
| 18-month | LendingClub | $380 |
5 more rows3 days ago
The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.
Market Crashes and CDs
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
Is it worth putting money in a CD right now? ›
The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022. Yet many banks are offering rates well above that—the best 5-year CDs have annual percentage yields (APYs) that exceed 4%, and some 1-year CDs are offering APYs well above 5%.
Do I pay taxes on CD interest? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Should I put a million dollars in a CD? ›
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
What is a good amount of money to put in a CD? ›
While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.
What will CD rates be in 2025? ›
But all told, it's pretty fair to assume that there will still be opportunities to lock in a CD at close to 5% at the start of 2025. And there's a good chance you'll be able to open a CD at a rate of 4% or more for a good part of the year.
How much will interest rates drop in 2024? ›
Mortgage rate predictions 2024
The MBA's forecast suggests that 30-year mortgage rates will fall into the 6.5% to 6.9% range throughout the rest of 2024, and NAR is predicting a similar trajectory. But Fannie Mae thinks rates could stay in the low 7% range this year.
What is the interest prediction for 2024? ›
Also, mortgage rates are still much higher than we've been used to in recent years. On 30 May 2024, the average 2 year fixed mortgage rate is 5.80%. While this is a significant drop from its July 2023 peak of 6.86%, it's still much higher than December 2021 when was 2.34%.
What is the interest rate forecast for the next 5 years? ›
The median projection for the benchmark federal funds rate is 5.1% by the end of 2024, implying just over one quarter-point cut. Through 2025, the FOMC now expects five total cuts, down from six in March, which would leave the federal funds rate at 4.1% by the end of next year.
