Be careful if you are saving. The options for high-yield certificates of deposit (CDs) are becoming fewer and fewer each day. Additionally, high-yield savings and money market accounts (floating rate savings accounts tend to fluctuate in conjunction with changes in the federal funds rate set by the Federal Reserve) are subject to changes in the central bank’s recent federal funds rate.・The yield may decrease due to the impact of the fund. Interest rate cut.
Here’s how global financial markets and economic indicators can affect yields on savings accounts like CDs and high-yield savings, and how to prepare for other obstacles down the road in a declining interest rate environment. Here’s what you need to know about whether you need one.
What’s happening in the financial markets these days?
The Federal Reserve cut the federal funds rate by 50 basis points (0.5 percentage point) on Wednesday. Raising the federal funds rate has the indirect effect of pushing up the annual percentage yield (APY) on deposit products such as CDs and savings accounts. Conversely, lowering the federal funds rate would have the opposite effect. Therefore, experts predict that savings account APYs will begin to be lowered soon, if not already.
We’ve already seen deposit account APYs drop immediately after the Fed’s rate cut announcements. For example, Vio Bank’s money market account, which remained unchanged for some time, ended up reducing its APY offering by 10 basis points.
Greg McBride, CFA, chief financial analyst at Bankrate, says the amount of interest banks pay on savings accounts and CDs at any given time reflects their need for deposits more than anything else. “They’re not paying those returns out of charity,” McBride said, noting that those who cut interest rates the most are less hungry for deposits than those who continue to offer the most competitive returns. point out that it is highly possible. “As savers, we are in a position to use that difference to our advantage,” McBride added.
Where are savings account yields headed?
CD
CD yields are generally expected to move in one direction: downward. “We’re on a downward slope, and it’s going to accelerate if the Fed starts cutting rates,” McBride said. “Therefore, there is no benefit to waiting for lock-in.”
If you’re looking for a 5% 1-year CD, it’s still available. However, it may not last long even after the Fed cuts, especially with interest rate cuts expected in the near future.
CD yields generally peaked at the end of 2023.
High-yield traditional savings account
Yields on high-yield savings accounts could continue to fall as the Fed cuts rates further. For example, Ally Bank lowered its yield on June 25, 2019, a little more than a month before the Federal Reserve announced a cut in the federal funds rate at its July 31, 2019 meeting, which was the lowest in 2018 at the time. This was the first rate cut since then.
Unlike CDs, which typically have a fixed rate of return, interest rates on savings accounts generally fluctuate. That is, it fluctuates depending on the federal funds rate. One exception is savings accounts with introductory APYs.
Yields on some traditional savings accounts, especially those whose yields did not increase during the Fed’s 11 rate hikes since March 2022, may not change at all. For example, the Chase Savings Account and Premier Savings Account each have a standard interest rate of 0.01 percent APY.
money market account
A money market account is a type of savings account that combines the features of both a checking account and a savings account. As with savings accounts, money market yields are likely to continue trending downward after the Fed cuts rates, and could fall further if the Fed cuts rates again soon.
What will happen in 2024 and how should you prepare for possible headwinds?
Interest rates are trending downward and may remain so for some time. Unlike savings accounts, which typically have variable yields, CDs allow you to lock in your interest rate for a set period of time. However, they may not be suitable for everyone.
For example, CDs may not be a good option for people who will be using cash in the near future or who don’t have an emergency fund, which is usually kept in a savings account.
If you are considering purchasing a CD, you should consider the following:
- Do I need to withdraw money before the CD expires?
- Are you sure you’ll earn an APY on the money you keep in your CD?
- Do you have enough funds so you don’t have to withdraw from your CD or pay early withdrawal penalties?
If you think CD is right for you, don’t wait as the yield may be lower. “We’re at the tip of the iceberg,” McBride said. “Both CD and liquidity accounts will see a decline in yields, and the pace will accelerate in the coming months as the Fed begins lowering rates.” Changing the yield on or money market accounts could make the APY less competitive. That’s why McBride says it’s a good idea to compare APYs when you receive your monthly statement. “You need to know where you stand and what else is available to you,” McBride says.
conclusion
After 29 months of a buoyant interest rate environment, interest rates are starting to fall, but with top yields still above inflation, now is still a great time to save. If you’re earning a yield well above the current inflation rate of 3.0%, your money hasn’t lost its purchasing power.
Whether your term is short or long, you can secure a yield that will easily exceed inflation.
— Greg McBride, CFA, Bankrate Chief Financial Analyst
The Fed’s modest 50 basis point rate cut won’t make much of a difference, as inflation has declined and 11 rate hikes totaled 525 basis points. At least for now.
– bank rate marcos cabello Contributed to updating this article.
