Will Rate Cuts Cause CD Yields to Plunge in 2025?

The Federal Reserve recently cut interest rates for the first time in more than four years, and many savers are concerned that interest rates on CDs, high-yield savings accounts and money market accounts will fall. While it is true that the interest rates offered by banks tend to move in the same direction as those offered by the Fed, the relationship is not perfect. 2021 and sooner again soon.

With that in mind, here’s a look at the Fed’s latest interest rate expectations, how the Fed rate cuts are affecting CD yields, and why CD yields may not fall as much in 2025 as you think.

Want to lock you up Today high CD yields? Check out our updated list of the best CD rates of top banks at the moment.

Expectations about interest rate cuts

I’ll get started on it right away. The federal funds rate is currently set at a target range of 4.75%-5.00%. The Federal Reserve’s latest guidance is for a federal funds target of 4.25%-4.50% at the start of 2025 and a range of 3.25%-3.50% by the end of the year.

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

American Express® High Yield Savings API 4.10% Rate information Circle with the letter I in it. Annual return of 4.10% from October 22, 2024 Member FDIC.	API 4.10% Rate information Circle with the letter I in it. Annual return of 4.10% from October 22, 2024	Min. earn $0
Capital One 360 ​​Performance Savings API 4.10% Rate information Circle with the letter I in it. See the Capital One website for the most current rates. Advertised Annual Yield (APY) is variable and accurate as of September 27, 2024. Rates are subject to change at any time before or after account opening. Member FDIC.	API 4.10% Rate information Circle with the letter I in it. See the Capital One website for the most current rates. Advertised Annual Yield (APY) is variable and accurate as of September 27, 2024. Rates are subject to change at any time before or after account opening.	Min. earn $0
CIT Platinum Savings API 4.70% APY for balances of $5,000 or more Rate information Circle with the letter I in it. 4.70% APY for balances of $5,000 or more; otherwise 0.25% APY Min. earn $100 to open an account, $5,000 for maximum APY Member FDIC.	API 4.70% APY for balances of $5,000 or more Rate information Circle with the letter I in it. 4.70% APY for balances of $5,000 or more; otherwise 0.25% APY	Min. earn $100 to open an account, $5,000 for maximum APY

For context, it’s important to point out that a target federal funds rate of 3.25%-3.50% is still relatively high by recent historical standards. After all, the peak of the federal funds rate during the last rate hike cycle (2016-2019) was less than 3%, and the benchmark rate was set at near zero from 2020 to early 2022.

So even if the Fed’s rate cuts go as expected, so will the benchmark rate still are higher than at any time since the mid-2000s before the current cycle.

What does this mean for CD revenues?

First, the interest rates that banks pay on deposits do not have a directly relationship to Fed interest rates. However, because the federal funds rate affects the costs banks incur to borrow money, interest rates tend to move in the same direction.

With high-yield savings accounts and money market accounts, the relationship is usually more direct. Unlike CDs, there is no time component with these, meaning interest rates can change at any time. Basically, their rates are based on the current interest rate environment.

For CDs it’s a little more complicated. The simple explanation is that the longer the term of a CD, the more the interest rate will be determined future expectations for the interest rate environment.

This is why one-year CDs currently generally pay more than five-year CDs, despite the opposite traditionally being the case. Interest rates are expected to continue to fall in the coming years, which will affect the rates that banks are willing to pay for longer-term products.

Where will CD rates go in 2025?

No one has a crystal ball that can predict future interest rates, and I’m certainly no exception. But my overall expectation is that if the Fed’s rate cuts go as expected (which is a big if), CD rates for the shortest term (for example, CDs with a term of one year or less) will generally follow suit. In other words: if a bank offers an interest rate of 4.5% today on a CD with a term of one year, I expect something close to 3% at the end of 2025.

I would expect much less movement from longer term CDs. The top five-year CD rates from major online banks are currently in the upper 3% range, and while they will likely move slightly lower as the Fed cuts rates, I wouldn’t be surprised if five-year CD rates from top online banks remained around 3.5% until 2025.