Expectations that the Federal Reserve would cut its benchmark interest rate yet again became a reality on Wednesday when the Fed did just that, issuing a 25 basis point reduction. That brings the federal funds rate to a range between 4.25% and 4.50%. The move was the third such reduction made by the Fed this year and has brought the rate down a combined full percentage point from where it was in early September. But it came after two recent inflation readings showed that rate increasing, so the forecast for additional rate reductions in 2025 is now unclear.

Against this backdrop, savers who were able to capitalize on an elevated rate climate via certificate of deposit (CD) accounts may be pondering their next move. Whether they have a current account approaching maturity or are considering a new one, it helps to know which type to open in today’s evolving rate climate. Below, we’ll break down what to consider (and what to avoid) now that the Fed’s cut rates yet again.

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Which CD account should you open now that the Fed’s cut rates again?

The decision surrounding which CD account to open right now is a personal one, depending on your financial circumstances and your ability to keep your money untouched for the full CD term (or length). That noted, on the surface, it may be tempting to open a short-term CD now. A 3-month CD or a 6-month CD, for example, has a rate of 4.50% now. 2-year CDs, meanwhile, have rates of 4.25% while 3-year and 5-year CDs have the same. So if your goal is to earn the highest rate, a short-term CD account can accomplish that goal. But if you’re looking to earn as much interest as possible – which most savers are – a long-term account is the better option.

Let’s use $10,000 as an example. That amount deposited in a 6-month CD now will result in $222.52 earned upon maturity. But that same amount in a 2-year CD would leave you with $868.06 earned and $2,313.47 in a 5-year account. And that wide discrepancy in returns isn’t the only reason to open a long-term CD now.

With three Fed rate cuts already issued in 2024 and others likely for 2025, returns on all CD accounts, no matter the term, will continue to decline. But that won’t be a concern with a long-term CD since interest rates on CDs are fixed – the rate you open the account with will remain the same one your account matures with. Not only will this allow for predictable returns but it will allow your money to grow undisturbed, regardless of any Fed rate activity during that period. And considering that CD rates were barely above 1% in 2020 or 2021, locking in today’s still attractive rates for the long term can be beneficial for a wide swath of savers.

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What about high-yield savings accounts?

In recent years, high-yield savings accounts, which had rates comparable to the top CDs, were considered a good alternative. These accounts operate like traditional savings accounts do but at much higher interest rates. And while they’re still relatively high, the rates on these accounts are variable and liable to change as the interest rate climate evolves. That means additional reductions in line with the Fed’s actions, even if they don’t fall by the same proportion. So, if you want to maintain access to your funds, which CDs won’t allow, then a high-yield savings account could still be worth exploring. But if you’re able to leave your money in a CD for the long term, that’s arguably the better way to both protect and grow your savings.

The bottom line

Action taken by the Fed will require both borrowers and savers to be nimble in their approach. For many, this could mean moving a portion of their funds into a long-term CD account to both exploit today’s high rates – and maintain them in the face of additional rate cuts to come. Others, however, may be better served by using a high-yield savings account instead. No matter your situation, however, it’s important to have at least some money in a high-earning account now. With rate changes inevitable, it makes sense to earn as much interest as possible while you still can.

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