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After waiting years for an interest rate cut, borrowers finally got some relief in September when the Federal Reserve finally cut its federal funds rate. The reduction, the first since 2020, brought the rate to a range between 4.75% and 5%. Other rate cuts are possible now, too, as the Fed is set to meet again in November and December. This is great news for those looking for mortgages and personal loans. And it could lead to some minor relief for credit card users as well, as rates on that product are hovering near a record 23%.
But what about savers?
Those who have opened certificates of deposit (CDs) and high-yield savings accounts secured interest rates exponentially higher than they were in 2020 and 2021, making them a smart way to earn big returns. With the rate climate evolving again, however, some may be wondering about the benefits of opening one of these accounts now. One of the best ways to determine the worth of an account is by calculating the interest you stand to earn now that rates have been cut. And it’s simple to do so with a CD, which has a fixed interest rate that will remain the same until the account has matured. So, how much will a $5,000 CD earn now that rates are cut? That’s what we’ll calculate below.
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How much will a $5,000 CD earn now that rates are cut?
While CD rates aren’t immune from broader rate changes, they haven’t dropped dramatically either. It’s important to remember that rate hikes were issued gradually over an extended period. Rate cuts and, thus, rate drops on interest-earning savings accounts, will occur gradually, too. Plus, the rates lenders offer savers aren’t precisely affected by the same increments in which rate hikes (or cuts) are issued.
That being noted, here’s how much savers can expect to earn on a $5,000 CD now, timed to some readily available rates and terms:
- 6-month CD at 5.10%: $125.91 for a total of $5,125.91
- 1-year CD at 4.75%: $237.50 for a total of $5,237.50
- 18-month CD at 4.40%: $333.60 for a total of $5,333.60
- 2-year CD at 4.20%: $428.82 for a total of $5,428.82
- 3-year CD at 4.20%: $656.83 for a total of $5,656.83
- 5-year CD at 4.35%: $1,186.32 for a total of $6,186.32
As can be seen from these figures, rates on CDs are still high and valuable for savers. In a direct reversal from historic trends, rates on short terms are generally higher than long-term options, even post-September rate cut. But if you’re looking to make the most money possible, long-term CDs are the way to do so. So crunch the numbers and start shopping around to find the highest rate and best term possible to lock in now before additional rate cuts are issued.
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The bottom line
Interest rate cuts, while welcome for borrowers, will inevitably eat into what savers can earn with accounts like CDs. But that doesn’t mean that rates on these accounts have declined dramatically yet, either. Instead, with a $5,000 deposit into the right CD, savers could potentially earn hundreds and possibly thousands of dollars on their money. And that return will be guaranteed, even if rates fall during the CD’s term. Just be careful to only deposit an amount that you’re comfortable leaving in the account for the full term or you’ll risk having to pay an early withdrawal penalty to regain access to your money.