The Fed Is Finally Lowering Interest Rates. Should You Buy a CD Now?

It’s been a good year to have money in a savings account or a CD. The Federal Reserve’s benchmark interest rate has been at recent peak levels of 5.25%-5.50% since August of last year, which means savers have had a great opportunity to earn more interest on their money in the bank.

The Fed started signaling in 2023 that it was looking to start cutting interest rates after raising them in an effort to slow the pace of inflation. But it took the central bank until mid-September of this year to move forward with its first rate cut in ages. 

On Sept. 18, the Federal Reserve lowered its benchmark interest rate by half a point, decreasing it to 4.75%-5.00%. That’s considered a fairly aggressive move on the Fed’s part, since the central bank had the option to lower that rate by a quarter of a point but chose a more substantial cut. And seeing as how this new rate cut is likely to be the first of many, it’ll be interesting to see what approach the Fed takes at its next few meetings.

Now you should know that the Fed’s most recent rate cut has the potential to be great for borrowers. Mortgage rates, credit card interest rates, and other loan rates should begin to fall following this move. 

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Capital One 360 Performance Savings APY 4.25% Rate info Circle with letter I in it. See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Member FDIC.	APY 4.25% Rate info Circle with letter I in it. See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info Circle with letter I in it. 4.25% annual percentage yield as of September 18, 2024 Member FDIC.	APY 4.25% Rate info Circle with letter I in it. 4.25% annual percentage yield as of September 18, 2024	Min. to earn $0
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But the Fed’s actions aren’t the best news as far as CD rates (and other deposit accounts) are concerned. So if you’ve held off on a CD thus far but are still interested in opening one, your best bet is to move quickly. 

You don’t want to miss out

Even with the Fed being fairly aggressive with its first interest rate cut, there’s no need to panic that CDs are about to become worthless savings vehicles. Many people have enjoyed 5% CD rates for quite some time. But even if CD rates fall to, say, 4.5% or 4%, that’s not a bad deal at all. 

When you open a CD, you’re guaranteed your return, and you’re really taking on no risk provided your bank is FDIC insured and your deposit is limited to $250,000. So if you can only get 4%, it’s nothing to cry about.

At the same time, though, if you have money on hand, there’s no reason not to open your next CD now. If the Fed decides to be equally aggressive with its next rate cut, CD rates could fall faster than expected. You might as well get ahead of that situation and lock in your rate while they’re still fairly competitive.

Is a CD even right for you?

It’s easy to see the appeal of CDs, even with rates dropping below 5%. But before you rush to open one, make sure that’s the right place for your money.

If you’re not sure if you’ll need your funds for near-term expenses or goals, then sticking with a savings account is a better option. And if you’re not planning to use that money for a decade or longer, then investing it makes more sense than putting it into a CD. 

The stock market’s average annual return over the past 50 years is 10%, accounting for both good and bad years. So if you have a long investing window ahead of you, putting your money into stocks over CDs could really pay off nicely.

But if you’re convinced a CD is your best bet, act now. The longer you wait, the lower a rate you’re likely to end up with.