After nearly 20 months, the Federal Reserve may finally be done with rate hikes. If you were holding out for higher savings rates, experts suggest taking advantage of competitive rates now.
“Current indicators suggest the Fed will halt rate hikes due to stabilizing economic and inflation conditions, paired with global economic concerns,” said William Bevins, a certified financial planner at Cypress Capital.
Inflation is still higher than the Fed’s target of 2%. The latest CPI report shows inflation remains sticky, coming in at 3.7% for the past 12 months, and rising 0.4% from August to September. Though the Fed hinted there could be further rate hikes this year, some experts think the Fed may continue to hold rates steady.
“If the Fed stops raising rates, it’s normal to expect decreased yields on high-yield savings and CDs in the short term,” Bevins said. And while savings rates are unlikely to drop significantly this year, if the Fed is done with rate hikes, the time to take advantage of high savings and certificate of deposit rates is now.
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The latest on savings and CD rates
Savings and certificates of deposit rates have been on a steady incline, yielding more interest on the money you’re saving on goals such as your emergency fund, a down payment for a home or a sinking fund for holiday spending. Even this week, many banks pushed CD rates higher for short and long terms. For instance, Marcus by Goldman Sachs pushed rates up for many of its terms this week -- with annual percentage yields now falling between 4.10% and 5.20%. But that could change after the next Fed meeting in November.
“The decision to stop raising rates could stabilize or slightly lower the yields on high-yield savings and CD accounts in the short term,” Jeff Rose, a certified financial planner.
Here’s where the average CD and savings rates stand based on banks we track at CNET.
- High-yield savings: 4.82%
- 6-month CD: 4.75%
- 1-year: 5.29%
- 3-year: 4.31%
- 5-year: 4.11%
Rates as of Oct. 16, 2023.
There’s still time to earn high interest on your savings. Most experts don’t expect rates to change much before the next Federal Open Market Committee meeting scheduled for Oct. 31 – Nov. 1. And even if the Fed holds rates steady or starts to lower them, that doesn’t mean banks will drop savings and CD rates overnight. But time is ticking. Some banks, such as CFG Bank, are already slowly lowering rates for select terms.
What the end of rate hikes mean for your savings
When the Fed raises its federal funds rate -- the interest rates that banks charge other institutions to borrow money -- consumer interest rates typically follow suit. While that’s good news for savers looking to earn a little extra on their money goals, if you carry debt, it also means your credit card bill or home equity loan may get more expensive.
If experts like Bevins are right, there’s a chance banks won’t be compelled to raise rates on interest-earning accounts, unless the bank wants to remain competitive or needs more deposits. But there is an upside.
“When rate hikes stop, borrowers generally benefit from maintaining lower interest rates on loans and credit cards,” Rose. This could help you save money on your debt payments, which you could potentially put towards savings goals. And although you’ll earn less on your savings, the rate environment may become more predictable, which could make it easier to plan financial goals and help manage your money, Rose added.
Here are three strategies you can apply to earn more on your CDs and savings accounts now, before rates drop.
Build a CD ladder
“In a scenario where the Fed stops hiking rates, account holders might explore laddering CDs to maximize returns and maintain some liquidity, diversifying investments to hedge against lower savings yields,” Rose said.
A CD ladder lets you spread your money across several CDs with different maturity dates. This lets you lock in high rates now while keeping your money more flexible since it will come due at different times. Right now, you can find higher rates on one-year CDs, so a CD ladder with a mix of CD terms can come in handy.
But keep in mind that CD ladders aren’t a “set it and forget it” strategy. You’ll need to watch rates to decide what to do with your money when a CD matures. And you’ll still pay an early withdrawal penalty if you take the money out of a CD before the term ends.
Lock in a long-term CD
For months, experts have weighed the best time to lock in a long-term CD given the changes and unpredictability of the rate environment. But once the Fed stops its rate hikes, experts agree it’s a clear sign that it’s time to lock in a long-term CD.
“This can guarantee a high yield for a specified period while minimizing risks. Shopping around for the best rates on deposits is also essential,” said David Donovan, executive vice president of financial services at Publicis Sapient.
Although banks usually offer the highest rate on longer-term CDs, right now, one-year CDs have the most competitive rates. But with the prospect of rates dropping, long-term CDs are still offering competitive yields -- the CNET average for a five-year savings rate is 4.11%.
If you have money to put in a three- or five-year goal and don’t want to risk stock market volatility or worry about spending it, a long-term CD is still worth considering. Just make sure you won’t need the funds, otherwise, you’ll pay an early withdrawal penalty that can be up to a year of interest for some banks.
Keep your high-yield savings account
Savings account APYs are unlikely to plummet any time soon, particularly since bond rates are still rising and banks want to remain competitive with them, Donovan said. So there’s still time to earn interest -- especially with rates over 5% for some savings accounts.
But even when savings rates drop, a high-yield savings account is still valuable. You’ll still earn higher-than-average interest on your savings, but the main appeal is that, unlike a CD, you can withdraw your money whenever you need it, without facing an early withdrawal fee. That’s why experts recommend a high-yield savings account for your emergency fund so you can access funds quickly if an unplanned car repair or unexpected medical bill pops up.
Don’t wait to take advantage of high savings rates
There’s still time to earn interest at the rates banks are offering today. But high savings rates won’t stick around forever. Now’s the time to start reevaluating your savings strategy and any financial goals you may have. Make a plan for what you’ll do with your money if you’re worried that falling rates will impact your goals while there’s still time.
