Is a CD still worth it now that the Fed has cut rates?
The moment borrowers have been waiting for finally came to fruition on Wednesday when the Federal Reserve announced its first rate cut since 2020. Frozen at a range between 5.25% and 5.50% for more than a year — the highest in decades — the federal funds rate was lowered by half a percentage point to 4.75% to 5%. And it could fall even further this year with two more Fed meetings scheduled for November and December.
While lenders don't follow the Fed directly, a reduction in the benchmark rate will inevitably result in lower rates for borrowers. And though that may provide some much-needed economic relief, it will also start reducing what savers have been accustomed to earning in recent years with products like certificates of deposit (CDs) and high-yield savings accounts.
CDs, in particular, have been a smart option for savers over the last few years, thanks to their high, locked rates. But are they still worth pursuing now that the Fed has started cutting interest rates? That's what we'll break down below.
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Is a CD still worth it now that the Fed has cut rates?
While a Fed rate cut may seem to make CD accounts less attractive, there's a compelling case to be made for opening one now while the benefits are still significant. Here are three reasons why you should:
Rates are still relatively high
CD interest rates are still relatively high right now, with today's rate cut already priced in by many lenders. That means you could secure a rate of 4% to 5% or maybe even more, depending on the term chosen, the amount deposited and the lender used.
Compared to the minimal 0.46% you'd earn with the average savings account, then, it becomes clear that CDs are still valuable, even if they're not quite as worthwhile as they were a year ago. But a series of rate cuts, which have now started, will affect CD rates, too. So don't wait too long, even if it means depositing a minimal amount to get started.
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Rates are locked
As was clear after Wednesday's Fed announcement, this cut doesn't seem to be a one-off. Instead, it appears that the Fed is heading toward a cooler rate climate overall. While this could always change based on any number of factors, savers shouldn't count on that happening.
To get ahead of these cuts, then, it makes sense to open a CD since rates on these accounts are locked. That means you'll earn the same interest rate for the full CD term no matter what happens to rates during that time. That's a major advantage CDs have now when compared to savings accounts that come with a variable rate that will fall as rates continue to decline.
You can earn significant sums of interest
A CD may not earn the big returns you can obtain by playing the stock market. But they also don't come with the same volatility and quick ability to lose all of your earnings, either. And with the right strategy and deposit, you could potentially earn hundreds, if not thousands of dollars, in interest with a CD. And because of the locked nature of CD rates, you can easily calculate these earnings before getting started.
For example, a $5,000 deposit into a 1-year CD with a rate of 5.40% could earn you $270 upon account maturity. If you double that deposit amount and simply keep the same term you'll also double your return. So crunch the numbers and see what you can come up with. In a cooling rate climate in which multiple factors could soon change, this predictable return can be especially valuable.
The bottom line
While interest rate cuts will undoubtedly lessen the appeal and benefit of CD accounts, it's premature for savers to consider alternatives. With just one rate cut now issued since 2020, savers can still secure high, locked rates on CDs – and they can earn hundreds and possibly thousands of dollars if they do so. But the rate climate is evolving again, so it behooves savers who are considering this option to be proactive.
