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If you’re considering opening a new savings account or certificate of deposit (CD), knowing how the Fed’s decisions impact your interest earnings over time is key to making an informed decision about where to put your money.
The Federal Open Market Committee (FOMC) held its last meeting on December 17 and 18, 2024. During this time, committee members discussed whether to raise, maintain, or lower the federal funds rate. And ultimately, they decided to cut the target rate for a third time this year.
The next meeting takes place on January 28 and 29, 2025, when committee members will once again consider whether it's time to change the federal funds rate.
These rate decisions are key indicators of the health of the economy and, ultimately, trickle down to affect deposit accounts. Here’s a closer look at how you can take advantage of today’s CD and savings rates in light of the Fed’s policy decisions.
The federal funds rate, explained
The federal funds rate is the target interest rate set by the Federal Reserve. It determines the rate that banks charge one another to borrow funds overnight in order to meet reserve requirements.
The federal funds rate is expressed as a range, which is currently 4.25–4.50%. Banks negotiate a specific rate between each other within that range.
The Fed uses the funds rate as a tool to quell inflation. When inflation is high, the Fed raises its target rate to make borrowing money more expensive, which discourages consumer spending and helps bring everyday costs down. When the economy needs a boost, the Fed might initiate a series of rate cuts to encourage more spending and borrowing.
Read more: A look at the federal funds rate over the past 50 years: How has it changed?
How the federal funds rate impacts your deposit accounts
Changes to the federal funds rate have major implications for financial institutions and the economy at large. But these decisions also affect your bottom line.
Although the Fed’s rate doesn’t directly impact the interest rates set by individual banks for consumer deposit accounts and loans, they are closely correlated. When the Fed raises its rate, for example, interest rates on deposit products such as high-yield savings accounts and CDs also tend to go up. And when it lowers its rate, deposit interest rates generally fall.
Should you open a new account before the next Fed meeting?
The Fed will meet again on Jan. 28-29 and decide whether or not to adjust the federal funds rate. (In its last meeting, the committee lowered the target range for the federal funds rate to 4.25%–4.50%.)
Even though the inflation rate is still slightly above the Fed's 2% target, most experts are all but certain that the Fed will cut its target rate again in 2025.
That said, we can’t know for sure what will happen in the future. So, while you wait for the Fed’s next announcement about how rates will change (or not), it could be a good time to evaluate your current savings account or consider opening a new account.
Should the Fed decide to lower the federal funds rate again, savings and CD rates continue dropping, which means now may be the last chance to take advantage of historically high interest rates while they're still available. In particular, opening a CD and locking in a competitive rate (which could be as high as 4.50% APY) could be a good move.
Read more: Can non-U.S. citizens open a bank account?
