There are mighty rumblings among the masses that the Federal Reserve is about to lower the federal funds rate for the first time since July 2019. Just how much is open to speculation, but what is abundantly clear is that the gains that savers have seen since rates started going up in March 2022 are about to start shrinking again.
It’s unlikely that the federal funds rate will fall low enough to drive certificate of deposit rates down to near zero, as has been seen in the past. But less interest is still less interest. You can lock your CD rates now before the Federal Reserve meeting in September and secure more interest for a little bit longer.
The federal funds rate and CD interest rates
Although the federal funds rate is not the same as the interest rate that is paid to CD holders, one certainly can and does affect the other. The federal funds rate is the rate at which banks borrow money from one another, so the rate they pay depositors is always influenced by the federal funds rate.
For example, in November 2022, the average yield for a 12-month CD was 4.66%, the federal funds rate was at 3.78% and had been on the rise for months, so banks were anticipating further rises in the future and were hoping to lock in lower rates from depositors while they still could.
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In January 2024, the 12-month CD rate was 5.16% and the federal funds rate was at 5.33% and had been holding for a while. Since banks thought it unlikely that rates would continue to climb, they were offering less interest relative to the federal funds rate.
Although there are fewer examples of a recent rate decrease to base our mental model of what is about to happen to CD rates, there was a federal funds rate drop from July 2019 through November 2019, and again from February 2020 to April 2020 that could give us a hint.
From July 2019 to November 2019, the federal funds rate went from 2.40% to 1.55%; from February 2020 to April 2020, it went from 1.58% to 0.05%. The 12-month CD rate fell from 0.65% in July 2019 to 0.50% in November 2019, and pretty much continued to drop continuously through June 2021, when it reached — wait for it — a whopping 0.05%, against a federal funds rate of 0.08%
| Month and year | Federal funds rate | 12-month CD rate | 60-month CD rate |
|---|---|---|---|
| July 2019 | 2.40% | 0.65% | 1.15% |
| November 2019 | 1.55% | 0.50% | 0.98% |
| February 2020 | 1.58% | 0.48% | 0.95% |
| April 2020 | 0.05% | 0.29% | 0.59% |
| June 2021 | 0.08% | 0.05% | 0.86% |
| November 2022 | 3.78% | 4.66% | 4.27% |
| January 2024 | 5.33% | 5.16% | 4.31% |
Data source: Federal Reserve Bank of St. Louis. Chart compiled by author.
So, although the federal funds rate doesn’t directly affect CD rates, which are set by individual banks, it does influence them greatly.
Here’s what you need to do today to lock in high CD interest rates
If you’ve been keeping your cash in a high-yield savings account up until now, it may be time to move it into a CD. Although it’s impossible to time the market for any kind of financial instrument, seeing a federal funds rate cut coming over the horizon means you absolutely need to plan for falling interest rates, however that best makes sense for you.
Choosing a CD is a great option, if you know how long you can keep your cash on the sidelines. A shorter CD will give you more flexibility, though you may lose out on interest if you don’t end up needing your cash when you expect.
However, if you choose one that’s too long and then need to break into it for liquidity, you’ll end up paying hefty fees that may negate any additional interest you might earn.
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