Fed cuts will 'take a bite out of savings,' CFP says. But there's still time to lock in higher rates

Lower interest rates will put a damper on the high returns savers have recently been able to earn on their cash.

The Federal Reserve approved a quarter-point rate cut Wednesday — and that could be just the start, with the central bank signaling the possibility for two more interest rate reductions in 2025.

"That's going to take a bite out of savings rates," said Stephen Kates, a certified financial planner and financial analyst at Bankrate.

Some online banks have already lowered their rates, with more cuts expected in future weeks, said Ken Tumin, co-founder of DepositQuest.

For some savers, it may make sense to lock in higher rates now.

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Certificates of deposit, or CDs, offer the opportunity to lock in returns for a certain period — such as a 3-month, 6-month, 1-year, 3-year or 5-year duration.

To be sure, CD rates will also be affected by the recent Fed cut, as well as any future moves by the central bank to lower rates. So experts say now could be a good time to lock in.

While 4% returns on cash have been possible this year with money market funds and online savings accounts, that likely won't be the case next year, Tumin said.

However, right now there are still CDs available offering 4% rates with durations that carry into next year, he said.

For someone who wants a good rate of return that's safe and conservative while minimizing risk, CDs can be a great option, said Kates. That also goes for someone in or near retirement, he said.

It is important to understand the terms of the CD before you sign on. Some CDs will charge a penalty if the funds are withdrawn before the term comes due.

Savers may be able to avoid that if they purchase a no-penalty CD, Tumin said. Those products often require a full withdrawal to access any of the money, he said.

Laddering CDs, where savings are invested in CDs with staggered maturity dates, can also be an effective strategy. Once a CD matures, it may be reinvested in another CD with a longer maturity, Tumin said.

When deciding where to put your cash, the priority should be how the money may be used, Kates said.

If the money is intended for an emergency fund, where the funds may need to be withdrawn in a pinch, or earmarked for a near-term expense like a vacation or home down payment, a CD may not be ideal, Kates said.

Savers may also opt to divide their cash between savings accounts and CDs to have liquidity for immediate needs and also lock in returns on a portion of their nest egg, Tumin said.

The good news for savers in high yield online savings accounts is those yields are still more than 3%, with a few top-yielding accounts at 4% or better, according to Bankrate. Those exceed the 2.9% 12-month inflation rate recently posted for the Consumer Price Index for August.

However, as lower rates set in, savers may want to watch to see if the terms on their accounts change.

"It's important for savers to keep a close eye on their accounts and what they're earning," Tumin said. "Banks can make rate changes very fast."