Sept. 18. That’s a key date for CD investors to know, as it could mark a turning point that causes generationally high yields to start to reverse course and head lower.
Specifically, Wednesday, Sept. 18, is the date when the Federal Reserve will announce its latest interest rate decision. The central bank is widely expected to lower the target range on the federal funds rate for the first time since 2020. This could have an almost immediate impact on CD interest rates.
With that in mind, if you have money in CDs, are thinking about putting money in CDs, or aren’t sure what the best income investment is for you, here’s what you need to know about what the Fed’s interest rate decision will mean to you.
The Fed is expected to lower the federal funds rate
The Federal Open Markets Committee (FOMC) is the name of the policy-making arm of the Federal Reserve. Among other things, this committee is tasked with setting the federal funds rate, a benchmark interest rate that has implications for the rates consumers pay when they borrow money and the yields they receive on deposits.
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Technically, the federal funds rate is the interest at which banks lend money to one another overnight, but it’s the consumer interest rate effects that you’re most likely to notice.
The federal funds rate is currently set in a target range of 5.25%-5.50% by the FOMC. It was increased rapidly in 2022 and 2023 to help fight inflation after being held at a “near-zero” target range of 0%-0.25% for about two years.
Eight times each year, the FOMC meets to determine its interest rate policy. As mentioned, the Fed is widely expected to lower rates at the conclusion of its September meeting. Experts disagree on whether the federal funds rate will be lowered by 0.25 percentage points or 0.50 percentage points, but the overwhelming consensus is that we’ll see the first interest rate cut since the COVID-19 pandemic started in early 2020.
What’s more, this is expected to be the first in a series of rate cuts that are expected to continue through 2025. In fact, by the time the FOMC meets in December 2025, the median expectation is that we’ll have seen a total of 2.5 percentage points of rate cuts.
What does it mean for CD investors?
The short answer is that banks that offer high-yield CDs will likely lower their CD interest rates soon after the Fed’s decision, according to the magnitude of the rate cut.
This is especially true when it comes to shorter-term CDs (say, 18 months or fewer), which tend to be most reactive to short-term interest rates. Longer-term CD yields tend to be based on a combination of the current interest rate environment and expectations for future interest rates, which is why 5-year CDs have generally paid lower interest rates than 1-year CDs in recent years.
Here’s how you can prepare
If you already have money in CDs, there’s nothing you need to do. Your interest rate is already locked in for the entire term.
On the other hand, if you have money on the sidelines and are thinking about opening a CD, or if you have money in a high-yield savings account that you aren’t going to need for the foreseeable future, it could be a smart idea to act quickly and lock in a CD rate before Sept. 18.
