The Federal Reserve recently cut interest rates for the first time since the onset of the COVID-19 pandemic in 2020. However, this is expected to be only the first of a series of rate cuts over the next two years at least.

CD rates at the biggest online banks fell slightly following the initial rate cut, but still remain near their highest level in more than a decade. But if the Fed continues on its expected rate-cutting path, what would that mean for CD rates in 2025? Here’s a rundown of what we know, what we don’t know, and how CD rates could be affected.

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Expected interest rate changes in 2025

The Federal Reserve recently cut the benchmark federal funds rate for the first time in more than four years, but that is expected to be just the beginning. Along with the rate cut, the Fed also released its members’ economic projections, and policymakers’ average expectation is for another 150 basis points (1.50 percentage points) of rate cuts between now and the end of 2025.

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How has the recent Fed rate cut affected CD rates?

CD rates and benchmark interest rates set by the Federal Reserve do not have a direct relationship. In other words, if the Fed lowers rates by 1 percentage point, there is no rule that says banks have to do the same. However, as a lower federal funds rate affects banks’ borrowing costs, financial institutions tend to move their CD yields in the same direction.

With that in mind, let’s take a look at how the Fed’s recent 50 basis point rate cut has affected CD rates so far. Here are some examples from our best online banks:

• In mid-July (before the interest rate cut), Discover® Bank was paying 4.70% on a 1-year CD, 4.40% on an 18-month CD, and 3.75% on a 5-year CD. On October 23, these rates were 4.10%, 3.80% and 3.40% respectively.
• Another of the highest-yielding banks on our radar, Barclays, was paying 4.85% on a 1-year CD, 4.00% on a 2-year CD, and 3.75% on a 5-year CD. Now the rates on the same three CDs are 3.75%, 3.00% and 3.25%.
• Finally, LendingClub was offering yields of 4.60% on a 1-year CD, 4.50% on a 2-year CD, and 4.00% on a 5-year CD. Today, those rates are 4.00%, 3.75% and 3.40%.

The general idea is that CD rates fell in response to the Fed’s rate cut, and shorter-term CDs generally saw the strongest downward moves.

Where will CD rates go in 2025?

To be perfectly clear, no one has a crystal ball that tells you what CD rates will be at any point in the future, but if the Fed continues to cut rates at the expected pace, it’s fair to assume that CD yields will trend downward in 2025.

I would expect shorter term CDs to be the most affected by Fed rate cuts. While I don’t want to turn this into an economics lesson, the simplified explanation is that short-term returns are primarily based on current interest rate environment, and long-term returns are based primarily on interest rate and economic expectations.

So if the Fed cuts rates by 1.50 percentage points between now and the end of 2025, I would expect 6-month or 1-year CD yields to drop by about the same amount. I would expect the same for high yield savings accounts. But for 5-year CDs and other relatively long terms, I’d expect a much smaller decline, as long as rate expectations or macroeconomic conditions don’t change much.