The Fed Rate Pause Is Great for Savers. Here’s How (2024)

The economy may be on the cusp of the elusive soft landing -- which avoids a recession -- as inflation continues to recede. In June, inflation rose 3% year over year, but economic factors convinced the Federal Reserve to hold interest rates steady for an eighth consecutive time at its July meeting last week.

Along with declining inflation, Fed Chair Jerome Powel pointed to the cooling labor market as good news in a recent press conference. “The risks to achieving our employment and inflation goals continue to move into better balance,” he said.

“We do not expect to reduce the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Powell added.

This interest rate pause will likely keep annual percentage yields, or APYs, on savings accounts and certificates of deposit elevated for a while longer. Currently, many banks and credit unions offer APYs of 5% or more on deposit accounts. Here’s how the Fed’s latest decision affects you and your ability to earn more interest on a savings fund.

How the Federal Reserve influences deposit rates

The Fed meets eight times a year to assess interest rate changes -- that’s about once every six weeks. At the most recent Federal Open Market Committee meeting on July 30-31, the Fed decided to keep the current federal funds rate at a range of 5.25% to 5.50%.

The Fed began targeting inflation with rate hikes in March 2022, and inflation hit a 40-year high of 9.1% in June of that year. The latest Consumer Price Index -- an inflation indicator that measures the percentage change in costs for goods and services -- found that headline inflation rose 3% year over year in June 2024. Inflation has eased significantly, but it’s still north of the Fed’s 2% target.

The Fed sets the federal funds rate, which determines how much banks charge to lend and borrow money. In turn, those rates influence deposit account APYs. If the federal funds rate is cut, APYs typically follow. The changes can take several weeks or even months to take effect.

Although some banks set their deposit account APYs according to the direction of the federal funds rate, timing and specific rates may vary. “Some big banks are swimming in deposits and they don’t need to pay up to bring in more,” said Greg McBride, chief financial analyst at CNET sister site Bankrate.

As such, there may be dramatic differences in account interest rates from bank to bank. “People should shop around, and they shouldn’t just shop around today; they should shop around a week from now, a month from now and three months from now,” said Gary Zimmerman, founder and CEO of MaxMyInterest.

When will rates drop?

“In March, the Fed predicted three quarter-point cuts by the end of the year, but that is still not certain,” said Daniella Flores, a CNET Money Expert Review Board member. “[We] could see a potential cut in September unless the job market continues to do well.”

Home prices may also impact future Fed decisions on interest rates. “If we start seeing more of a slump in home purchases due to high interest rates, this could signal a tightening financial environment for consumers,” said R.J. Weiss, certified financial planner. “In this scenario, the pressure might mount on the Federal Reserve to consider lowering interest rates to stimulate borrowing and spending.”

Predicting exactly how rates will change over the next few months isn’t an exact science. “Predictions about interest rates are really difficult to make even though the Fed is very open with what they want to do,” said Jordan Gilberti, certified financial planner and senior lead planner at Facet.

Gilberti suggests preparing for the worst scenario when thinking about the best strategies for growing your savings, whether you’re setting aside cash for an emergency or building a sinking fund. Since rates may be at peak highs, purchasing a CD or moving your money to a high-yield savings account as soon as possible is the best strategy for maximizing your interest earnings.

The best savings accounts to open now

Understanding the pros and cons of each deposit account type can help you make the best choice for your needs.

Traditional savings accounts

Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be convenient. These accounts often pay minimal interest on your savings. The average annual percentage yield for a traditional savings account is only 0.45%, according to the FDIC.

High-yield savings account

A high-yield savings account is an interest-earning account often offered by online banks, credit unions or other financial service institutions. The best APYs available on high-yield savings accounts are more than 5%.

Certificate of deposit

A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time at a predetermined APY.

Competitive one-year CDs, for example, currently earn APYs as high as 5.30%.

No-penalty CD

A no-penalty CD is a specialty CD that offers a fixed rate for a specific term, like traditional CDs. This deposit account doesn’t impose an early withdrawal penalty if you need to access your money before the term ends. These CDs are generally less widely available, and the APYs are lower. The additional flexibility can be worth a slight drop in rates.

Tips for finding the right savings account or CD

Keep in mind that larger, brand-name banks with bigger marketing budgets aren’t the only ones offering competitive rates on savings accounts and CDs. Community or regional banks, credit unions and online-only banks often offer higher rates on deposit accounts to attract new customers.

“[Savers] need to think carefully about which savings accounts or CDs [to open],” Baruch Silvermann, CEO of The Smart Investor, wrote in an email to CNET. “With such uncertainty, it may not be a good idea to tie up your money for a longer term. You are likely to want the flexibility to be able to move your money fairly freely when a better opportunity arises.”

“[If] you’re looking at CDs, concentrate on shorter terms, so you can reinvest or move your money when they mature. Alternatively, you could choose a longer-term CD if there is no withdrawal penalty,” Silvermann added.

The best high-yield savings accounts continue to offer APYs up to 5.35%, low fees and no minimum balance requirements. The best CD rates have settled slightly, but you can still lock in an APY as high as 5.30%. When evaluating a savings account, note any fees associated with opening or maintaining the account. CDs offer a safe, fixed rate of growth -- as long as you can leave the funds in the account until the maturity date to avoid early withdrawal penalties. Terms can last anywhere from three months to five years or more.

Additionally, confirm that your deposit is insured by either the Federal Deposit Insurance Corp. (for banks) or the National Credit Union Administration (for credit unions). This protects your money for up to $250,000 per person, per institution if the bank fails. You should also compare APYs and how easily you can access your money before making your decision.