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The Federal Reserve is preparing for its September meeting, where the board may decide to cut the federal funds rate in response to rising inflation.
If the Fed lowers rates, it could impact savings account yields. Here’s how consumers can lock in a steady annual percentage yield (APY), even in the months following the central bank’s upcoming decision.
Rising Costs
The Federal Reserve is expected to cut interest rates at its meeting on September 17. In a Reuters poll, nearly all 107 economists surveyed said the board will lower the federal funds rate by 25 basis points to combat inflation risks.
Recent employment data from the Bureau of Labor Statistics supports this outlook. The August Employment Situation Summary revealed that nonfarm sectors added just 22,000 jobs, and the unemployment rate rose slightly from 4.2% to 4.3%.
Lowering interest rates can stimulate the economy by making loans more accessible and strengthening consumers’ ability to pay off debt. On the flip side, lower rates can reduce the returns consumers earn on savings accounts.
Lower interest rates will likely affect high-yield savings accounts (HYSAs) and certificates of deposit (CDs), which generally offer higher APYs than standard savings accounts. According to the Federal Deposit Insurance Corporation (FDIC), the average savings account currently offers an APY of 0.39%.
Savings accounts like CDs offer much higher rates, typically ranging from 3% to 5%, making them more attractive for consumers looking to park their money.
CDs are savings accounts that hold a fixed amount of money for a set period, usually ranging from a few months to several years. You typically can’t withdraw the money until the CD reaches its maturity date unless you pay a penalty fee. The advantage is that your APY stays fixed for the entire term—unlike HYSAs, where the APY can change at any time.
How You Can Lock In
While all types of savings accounts could be affected if the Federal Reserve decides to lower interest rates, there’s still time to act. With a few days to go before the decision, consumers can open a CD now to lock in a fixed APY.
The main benefit of a CD is that it locks in your agreed-upon rate for the entire term, regardless of what the Fed decides. If you open a CD before September 17 and rates are lowered afterward, your CD rate won’t change.
Here are some of the top CD rates.
While consumers should shop around for the best CD, there are a few key factors to consider. Most importantly, pay attention to the account’s APY, term length and compounding schedule—each plays a critical role in your overall earnings.
Some CDs compound interest daily, while others do so monthly. The more frequently the interest compounds, the more you’ll earn over time.
Bottom Line
Federal rates could drop in a matter of days. Consumers can lock in today’s higher APYs by opening a certificate of deposit before the Federal Reserve’s September 17 meeting.