Why I'm (Still) Not Opening Any CDs in 2024 -- Even if the Fed Cuts Rates Soon

The latest economic data seem to suggest that inflation is slowing down -- and so is the job market. That means the Fed might be on course to cut interest rates soon. No one knows for sure when (or if) the Fed will cut interest rates, but if there is a rate cut of (for example) 0.25% in September 2024, that means right now could be a perfect time to open a high-yield 1-year CD.

The best CDs are currently paying 5.00% APY (and higher), and CD rates are fixed for the length of the term. So if the Fed cuts interest rates, and you lock in a higher APY right now, you could keep earning 5.00% APY on that CD for the next 12 months, while bank savings accounts (likely) would decrease their APYs along with the Fed's moves.

But I'm not convinced that CDs are the best place to keep my cash, even if the Fed cuts interest rates in 2024 and 2025. Here are a few reasons why.

I don't want to risk early withdrawal penalties on a CD

CDs give you fixed APYs for the length of the term -- but they also punish you with early withdrawal penalties if you need to take your money out. I don't believe that a slightly higher APY on a CD, especially if it's only 0.25% higher than the best savings accounts, is worth taking the risk of getting charged a penalty for taking out my money.

Our Picks for the Best High-Yield Savings Accounts of 2024

Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of August 23, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings On American Express's Secure Website. Member FDIC.	APY 4.25% Rate info 4.25% annual percentage yield as of August 23, 2024	Min. to earn $1
UFB Portfolio Savings Account APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. Min. to earn $0 Open Account for UFB Portfolio Savings Account On UFB's Secure Website. Member FDIC.	APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts.	Min. to earn $0

The best savings accounts are more liquid than a CD. With savings accounts, you can take your cash out anytime, for any reason (as long as you don't exceed certain monthly limits on the number of withdrawals). And you can still earn APYs (for now) of 5.00% or more with savings accounts.

CDs put you through hassle and take away some (or all) of your earned interest if you need to withdraw cash. You might as well just keep your money in a savings account, even if the APY ends up being slightly less than a CD.

Savings account APYs are still competitive with CDs

Right now, the best savings accounts are paying about the same APYs as the best 1-year CDs. This situation would likely change if the Fed cuts interest rates -- savings account rates can go down at any time, and often track the latest changes from the Fed.

But even if the Fed cuts interest rates tomorrow, and keeps cutting by another 1% during 2025, that still doesn't mean opening a 1-year CD or longer-term CD is the best move to make today. Unless you have lots of cash (like $100,000 or more), you're not likely to gain enough extra yield by gaming the market or trying to out-think the Fed on interest rates.

How much you'd earn with the best 1-year CD vs. savings accounts after rate cuts

Think of it this way: if you open a $10,000 1-year CD in July 2024 at 5.00% APY, yes, you are guaranteed to earn $500 in the next year before your CD matures. If the Fed cuts interest rates by 1.25% by July 2025 (which is not guaranteed), your CD will keep earning that full $500 of yield.

But how much less would you have earned with one of the best savings accounts instead? Let's make the wild assumption that the Fed cuts rates by 1.25% all at once (this is extremely unlikely to happen, ever). Let's assume that the best savings account APYs then go from 5.00% to about 3.75%.

Here's how much you'd earn in one year with a few different amounts of savings in a 3.75% APY savings account, compared to a 5.00% APY 1-year CD:

According to 2023 research by The Motley Fool Ascent, the typical American savings account has $1,200 in it -- so if you put that much into a CD, even if the Fed cuts interest rates aggressively in the next 12 months, you'd only get an extra $15 (at most). If you have more money, like $25,000, your extra CD earnings can be a bit more substantial -- but still less than $30 per month. Is that worth locking up your money and having to pay early withdrawal penalties if your plans change? I say no.

And keep in mind: we're making some wild assumptions here about how fast the Fed would cut interest rates and how rapidly the best savings account APYs would go down in response. The difference in earnings in real life would likely be smaller -- because the best savings accounts would keep earning higher APYs for a while longer as the Fed made a series of 0.25% rate cuts.

Bottom line

Unless you have massive amounts of cash to put into a CD, the freedom and flexibility you get from a savings account or money market account will likely outweigh the extra earnings you'd get from locking in a higher APY on a CD. Even if the Fed cuts interest rates soon, you're not likely to make enough extra yield from opening a 1-year CD today compared to what you'd get in the next year from the best savings accounts.