In September, the Federal Reserve cut benchmark interest rates for the first time in more than four years. While this is good news for people who need to borrow money, it is not the best news for savers. The Fed’s interest rate cuts will likely lead to lower interest rates on savings accounts, money market accounts, and certificates of deposit (CDs).

However, there is some good news. Recent economic data indicates that the Fed’s interest rate cuts may come more slowly than previously expected. This could mean that CD rates may not fall as quickly as many people fear.

Want to lock in today’s high CD rates? Click here for our updated list of CD rates from the best online banks.

Expectations for a Fed rate cut have moderated

According to CME’s FedWatch tool, which looks at interest rate expectations that are priced in financial markets, there is a 94% chance the Fed will cut rates by 25 basis points (a quarter of a percentage point) in November. A month ago, there was about a 30% chance that the rate cut would be twice as large.

Our picks for the best high-yield savings accounts of 2024

Capital One 360 ​​Performance Savings APY 4.00% Price information Check the Capital One website for the most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of October 23, 2024. Rates may change at any time before or after account opening. Member FDIC.	APY 4.00% Price information Check the Capital One website for the most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of October 23, 2024. Rates may change at any time before or after account opening.	Min. to win $0
CIT Platinum savings APY 4.70% APY on balances of $5,000 or more Price information 4.70% APY on balances of $5,000 or more; otherwise, 0.25% APY Min. to win $100 to open account, $5,000 max APY Member FDIC.	APY 4.70% APY on balances of $5,000 or more Price information 4.70% APY on balances of $5,000 or more; otherwise, 0.25% APY	Min. to win $100 to open account, $5,000 max APY
Western Alliance Bank Premier High Yield Savings APY 4.81% Price information The Annual Percentage Yield (APY) is accurate as of October 21, 2024 and is subject to change at the Bank’s discretion. Check the product website for the latest APY rate. The minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to win $500 to open, $0.01 max APY Member FDIC.	APY 4.81% Price information The Annual Percentage Yield (APY) is accurate as of October 21, 2024 and is subject to change at the Bank’s discretion. Check the product website for the latest APY rate. The minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	Min. to win $500 to open, $0.01 max APY

A similar adjustment in expectations occurred for the December Fed meeting. A month ago, markets priced in a 64% probability that we’d see at least 75 basis points in rate cuts by the end of 2024. Now, the probability of that happening is pegged at 0% .

In short, the Fed is expected to continue cutting rates, but at a significantly slower pace than previously expected.

The reason is that economic data came in generally stronger than expected. For example, in the latest CPI inflation update, the annual inflation rate of 2.4% was slightly higher than expected. When the September jobs data came out a few weeks ago, not only did we learn that 254,000 jobs were added during the month versus an expectation of 150,000, but that wage growth was better than expected.

The Federal Reserve’s job is to control inflation and maximize employment. With lower inflation and strong jobs data, there is simply no need for an aggressive rate cut.

CD rates will likely decline, but more slowly

To be perfectly clear, CD rates are not directly tied to the Fed’s interest rate decisions. However, the benchmark federal funds rate (the rate people are referring to when they say “the Fed cuts rates”) affects how much it costs banks to borrow money, so it also affects what banks are willing to pay for deposits.

In short, CD rates and the Fed’s benchmark interest rates usually move in the same direction.

So if Fed rate cuts occur at a slower pace than previously expected, CD yields would likely do the same. To be clear, it would still be wise to expect CD rates to generally decline over the next year or two, but it certainly could happen more slowly than many expected.

What to expect in 2025 and beyond

With the interest rate cut in September, members of the Federal Reserve released their economic projections, which, among other things, include expectations for future interest rate activity.

The average expectation for the end of 2025 is a total of 150 basis points of rate cuts (1.5 percentage points) compared to current levels. If this were to happen as expected – and believe me, it’s a big deal if — I would expect short-term CD rates and high-yield savings account interest rates to move about the same amount.

On the other hand, longer-term CDs, such as those with 5-year CD terms, tend to have rates that are based primarily on expectations of future interest rates. So, unless something changes dramatically with the Fed’s outlook, I wouldn’t expect 5-year CD rates to drop much over the next year.