What Fed Rate Decisions in 2024 Mean for CDs

The Federal Reserve lowered the federal funds rate by 50 basis points, or one-half of a percentage point, on Sept. 18. This decrease is the first rate drop since March 2020, and the Fed rate’s current range of 4.75% to 5.00% is still high compared to what it was for most of the past two decades^[0]

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This rate, which is what commercial banks use to borrow and lend money to one another, remained unchanged from August 2023 through August 2024. The last rate change was a 0.25 percentage point increase that occurred on July 26, 2023^[0].

This rate doesn’t directly raise or lower rates on certificates of deposit, but it can affect them indirectly. When there’s a Fed rate increase, you might see higher CD rates. Here’s a closer look at how it works.

The most competitive rates on CDs for three-month to five-year terms remain above 4% annual percentage yields, with the best short-term CDs (six-month to one-year terms) above 4.50%. CD rates continue to be higher than they’ve been for most of the past decade, and multiple Fed rate increases help explain how rates skyrocketed from being around 1% or lower in January 2022 to their current heights. The highest rates tend to be at online banks and credit unions. However, the high CD rates have probably peaked. As the Fed continues to cut its rates, CD yields will likely follow that trend and drop too.

As the U.S. central bank, the Federal Reserve tries to keep the economy steady using an important rate it can influence: the federal funds rate. This is roughly the cost of borrowing cash overnight between banks. Typically the Fed lowers its rate to help stimulate the economy and raises it to help curb inflation^[0].

Banks generally follow the direction of the Fed funds rate in setting their rates on loans and savings accounts, including newly issued CDs. So a lower Fed rate can result in lower CD rates, but it may not happen instantly^[0]

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Locking in high CD rates before they fall further might make sense if your current savings account rates are near 0% and not helping to fight inflation in any sense. Inflation, or the rate at which the price of goods and services increases, has changed the savings habits of about seven in 10 savers, according to NerdWallet’s 2022 report.

The short answer is no. Online banks and credit unions, which have some of the highest CD rates, have steadily lowered their rates since January 2024, with bigger drops in August than in previous months, according to a NerdWallet analysis. See more about current CD rates.

National average CD rates for one- to five-year terms have stayed relatively steady so far this year, remaining above 1.30%, according to a NerdWallet analysis of rate data from the Federal Deposit Insurance Corp. But Fed rate cuts will likely push CD rates down. Meanwhile, some of the largest U.S. banks have barely moved their standard CD rates for years, regardless of Fed rate changes.

A Fed rate hike can lead to higher rates for regular savings accounts and CDs, but the differences between these accounts can impact which to use and when.

A regular savings account usually has a variable rate, meaning it can change. Your money may earn more interest when the rate rises and less interest when the rate drops. Since you can add or withdraw money over time, this account provides a flexible way to build up savings. See the latest high-yield savings account rates.

A CD generally has a fixed rate. When you open a CD, you lock up an upfront sum of money at one interest rate for a term usually ranging from three months to five years. CD rates tend to be higher than regular savings account rates, but in exchange, you lose access to money in a CD until the term ends unless you pay a penalty to withdraw early.

CDs can be good for setting aside a sum earmarked for a large future purchase, such as a car or house, or simply as a low-risk place for some savings you’ll need years from now. Learn more about when CDs are worth it.

A bank generally changes rates on newly issued CDs over time, but CDs that customers already opened don’t have rate changes. The main exceptions are step-up and bump-up CDs, which are structured for potential rate increases during a term.

Every bank sets its CD rates, but only some have high-yield CDs. Online-only institutions can afford to offer higher rates than brick-and-mortar banks since they don’t have the costs associated with managing a branch network. See the best CD rates.

The standard trend is the longer the CD term, the higher the rate. Longer can mean four- to five-year CDs compared to six-month to one-year CDs. Bear in mind, though, another trend: The longer the term, the higher the penalty for an early withdrawal. The penalty is usually interest earned over a number of days or months, or even years.

If you want both ongoing access to some money in CDs and high rates, you might opt for a CD ladder. This involves opening multiple CDs with staggered end dates, allowing you to choose to reinvest or withdraw funds after each CD matures. Learn more about CD ladders.

These two types of CDs allow for an interest rate increase during the term, but not every bank offers them. Step-up CDs give the bank control over when increases occur, generally on a fixed schedule. Bump-up, or raise-your-rate, CDs give you the ability to request a rate increase but only if new CDs for the same term go up. In a falling rate environment, bump-up CDs might be stuck with their initial rates. Learn more about step-up and bump-up CDs.

CDs can be a great way to set aside some savings for a near-future goal. And although each Fed rate decrease might not lead to dramatic changes, it’s still a good idea to monitor your bank or credit union’s response and compare it with those of other banks and credit unions. In addition, see other ways to save without a savings account.