By: Matthew Goldberg,
Bankrate.com
Savers, take note: Your options for high-yielding certificates of
deposit (CDs) are getting fewer by the day. What’s more, high-yield
savings and money market accounts – variable rate deposit accounts that
are prone to change in lock step with changes to the federal funds rate
as set by the Federal Reserve – could see their yields drop before the
Fed’s next interest rate meeting on Sept. 18.
Financial pundits and market prognosticators are confident that the Fed
will lower interest rates in September. As of Aug. 8, the CME Group
FedWatch tool, which is based on federal fund futures contract prices,
projects a 100 percent likelihood of a rate cut. Inflation is down and
unemployment is up, two reasons for the Fed to lower rates at its next
meeting.
But the latest performance in financial markets has also affected some
yields on deposit accounts, most notably CDs. In the course of a few
days late last week, economic uncertainty in the U.S. over inflation, a
weakening jobs report and fears of a possible, yet unsubstantiated,
recession, sent financial markets roiling, particularly in Japan.
Here’s what you need to know about how global financial markets and
economic indicators can affect yields on deposit accounts such as CDs
and high-yield savings, and how you should prepare for other future
roadblocks in a declining rate environment.
What has happened in the financial markets as of late?
The dog days of summer have hardly been lazy for both the U.S. and
global economies as markets were reacting wildly to economic rumors and
predictions. Although the Fed decided once again not to lower rates at
its July 31 meeting, Fed chair Jerome Powell said rate cuts could be on
the table in September, causing some banks to begin lowering annual
percentage yields (APYs) on their CDs.
Then there was the disappointing U.S. jobs report on Aug. 2, followed by
the unwinding of the Japanese “Yen carry trade” – where institutional
investors borrowed against the yen at near-zero rates to buy growth
stocks – causing Japan’s Nikkei index to plunge 12.4 percent on Aug. 5,
it’s worst drop since 1987. Later that day, in the U.S., the Dow Jones
Industrial Index fell 2.6 percent, a drop of more than one thousand
points, further prompting speculation that the Fed may cut rates sooner.
It’s been a little more than a year since the Fed last increased the fed
funds rate for the 11th time in the current rate cycle, which remains at
a range of 5.25-5.50 percent. After being in an increasing and elevated
rate environment since March 2022 – and with inflation currently more or
less under control – what goes up has to come down. And that’s why the
Fed is likely to lower the federal funds rate to help maximize
employment and stabilize prices.
What recent trends in the markets mean for deposit accounts
Recent economic uncertainties and financial sentiment suggests that
rates on deposit accounts will decrease into 2025. Some financial
institutions, including online-only banks, have already lowered yields,
prompting more savvy savers to open CDs and take advantage of still-high
yielding APYs before rates go down further.
Some banks have noticed more demand as of late to these fixed-rate
deposit accounts. David Becker, chairman and CEO of First Internet Bank
of Indiana told Bankrate that he saw an increase in customer interest in
CDs over the past weekend and into Monday in the form of email
inquiries.
“We got a yell from the first floor that [demand for] CDs are going
through the ceiling,” Becker said. “Let’s back them down a little bit.”
As a result, First Internet Bank lowered APYs on its shorter-term
six-month and one-year CD terms by 0.10 percent, or 10 basis points, and
cut its longer-term CDs (18 months and longer) by 0.15 percent, or 15
basis points.
First Internet Bank, which had the highest one-year CD APY, as tracked
by Bankrate over the past two weeks, isn’t the only bank to reduce its
APYs. Barclays also lowered CD rates across the board on Aug. 6, which
included a 125 basis-point decrease on its 18-month CD, which started
the week at 4.50 percent APY and is now 3.25 percent APY. What’s more,
BMO Alto cut the APY of its two-year CD by 0.55 percent, or 55 basis
points, to 4 percent APY.
Greg McBride, CFA, Bankrate chief financial analyst, says the amount of
interest banks pay on savings and CDs at any point in time, is more a
reflection of their need for deposits than anything else. “They don’t
pay those returns out of benevolence,” McBride says, noting that those
cutting rates more drastically likely have less of a thirst for deposits
than those who continue to offer the most competitive returns. “As
savers, we’re in a position to exploit that difference to our benefit,”
McBride adds.
Where are yields headed among deposit accounts?
CDs
Just like at First Internet Bank and Barclays, expect CD yields to move
generally in one direction: downward. “We’re on the downslope and that
is going to accelerate once the Fed starts cutting interest rates,”
McBride says. “So there is no benefit to waiting to lock in.”
Since July 29, four of Bankrate’s top 10, one-year CDs have seen their
APYs decrease. But all of those 10 top-yielding CDs still offer yields
at 5.1 percent APY or slightly higher. So, if a 5 percent one-year CD is
what you’re looking for, it’s still available. But that might not be the
case before the Fed’s next rate meeting on Sept. 18. Generally, you can
expect CDs to have a rate cut built into its APY by the time a Fed rate
cut actually arrives.
CD yields generally peaked at the end of 2023.
High-yield and traditional savings accounts
High-yield savings account yields might decrease ahead of a
still-possible Fed rate cut in September, or it could come later. For
instance, Ally Bank lowered its yield on June 25, 2019, a little more
than a month before the Fed announced it was decreasing its fed funds
rate at its meeting on July 31, 2019, the first rate cut at the time
since 2018.
Unlike CDs, which typically have fixed-rate yields, the rates on savings
accounts are generally variable, meaning they move in relation to the
federal funds rate. One exception is a savings account with an
introductory APY.
Yields for some traditional savings accounts might not move at all,
especially those that haven’t increased their yields during the time the
Fed’s raised rates 11 times starting in March 2022. For example, Chase’s
Savings and Premier Savings accounts each have a standard rate of 0.01
percent APY.
Money market accounts
Money market accounts are a type of deposit account that sometimes
combines features of both checking and savings accounts. Just like a
savings account, money market yields might move before or after a Fed
rate decision.
Becker, who founded First Internet Bank, says the bank intends to keep
its savings and money market accounts at their current yields until the
day after the Federal Reserve changes the fed funds rate.
What’s ahead for 2024, and how should you prepare for possible
headwinds?
Rates are poised to move lower and might move lower for some time. CDs
allow you to lock in rate for a period, unlike savings deposit accounts
which generally have variable yields. But they might not be for
everybody.
For instance, a CD might not be a good option for people who are using
cash in the near future or people who don’t have an emergency fund,
which is usually kept in a savings account.
Those considering a CD should consider these questions:
•Will you need to withdraw the money during the CD’s term?
•Will the money you’re locking away in the CD earn a guaranteed APY?
•Do you have enough money available to ensure you won’t need to
withdraw from the CD and pay an early withdrawal penalty?
If you feel that a CD is right for you, don’t wait, as it might lead to
lower yields. “We’re at the tip of the iceberg,” McBride says. “We’re
going to see reductions in yields on both CDs and liquid accounts. And
that pace will accelerate in the months ahead as the Fed starts to cut
rates.” A bank or credit union that changes its yield on your savings
and/or money market account could make your APY no longer competitive.
That’s why McBride says it’s a good idea to compare APYs when you
receive your monthly statement. “You’ve got to know where you stand and
what else is available,” McBride says.
Bottom line
Even though rates are beginning to decrease after 29 months of a rising
and prosperous rate environment, it’s still a great time to save as top
yields are still outpacing inflation. As long as you’re earning a yield
that’s well above inflation, currently at 3.0 percent, then your money
isn’t losing purchasing power.
With lowering inflation, and 11 interest rate increases totalling 525
basis points, a small cut in the federal funds rate isn’t going to make
much of a difference. At least for now.
©2024 Bankrate.com.
Distributed by Tribune Content Agency, LLC.
