The Federal Reserve has recently lowered interest rates for the first time in over four years, causing concern among savers about potential decreases in yields on certificates of deposit (CDs), high-yield savings accounts, and money market accounts. Typically, interest rates offered by banks align with the Federal Reserve’s rate changes, but this correlation is not always perfect. Analysts suggest that the extremely low interest rates seen in 2021 and earlier are unlikely to reoccur soon.
The Federal Reserve’s projected interest rate adjustments indicate that the benchmark federal funds rate, currently set between 4.75% and 5.00%, is expected to decrease to a target range of 4.25%-4.50% at the start of 2025, with further reductions to 3.25%-3.50% by year-end.
In historical context, a target federal funds rate of 3.25%-3.50% remains relatively high. During the previous rate hike cycle from 2016 to 2019, the peak federal funds rate was below 3%, and near-zero rates persisted from 2020 until early 2022. Hence, even as the anticipated rate cuts are implemented, benchmark rates would still be higher than any point since the mid-2000s prior to the recent cycle.
As for CD yields, the interest rates banks offer on deposits are not directly tied to the Federal Reserve’s benchmark rates. Nevertheless, since these rates affect the borrowing costs for banks, they often trend in the same direction. The relationship between high-yield savings accounts, money market accounts, and interest rates is generally more immediate due to the absence of fixed terms for these accounts, allowing for real-time rate adjustments based on current market conditions.
CDs, however, present a different scenario. The expected future interest rate environment exerts considerable influence, particularly on longer-term CDs. This is why 1-year CDs currently offer higher rates than 5-year CDs, contrary to traditional trends, as banks anticipate declining rates in the coming years.
Looking ahead to 2025, while predicting exact interest rates is speculative, it is generally anticipated that shorter-term CD rates, such as those for CDs with terms of one year or less, will adjust downward if the Federal Reserve’s rate cuts occur as predicted. An example might be a 1-year CD rate dropping from 4.5% today to approximately 3% by the end of 2025. Conversely, longer-term CDs may experience less fluctuation; for instance, top 5-year CD yields from major online banks, currently around 3%, may only decline slightly, possibly maintaining around 3.5% through 2025, even amidst anticipated rate cuts.
