The Fed Is Holding Rates Steady—Here's What That Means for Your Savings

KEY TAKEAWAYS

• As expected, the Fed held interest rates steady today—its fifth hold in a row after hiking the federal funds rate to a 22-year high in 2023.
• The central bank is keeping its benchmark rate where it is until it feels confident inflation is falling closer to the Fed's target level.
• The Fed also released its quarterly "dot plot," which forecasts three rate cuts by the end of 2024.
• Because CD rates closely follow the Fed's benchmark rate, they likewise surged last year, reaching a historic peak last fall. But since then, they've been drifting lower.
• As soon as the Fed signals it's ready to start cutting rates, the drop in CD rates will accelerate—making this a smart time to lock in.

What the Fed Did Today

As was widely expected, the Federal Reserve's rate-setting committee announced this afternoon that it is maintaining the federal funds rate at its current level.1 It's the fifth meeting in a row in which the central bank has held its benchmark rate steady, after last raising it in July.23

To fight inflation that had reached a 40-year high, the Federal Reserve implemented 11 rate increases—some of them massive—across 12 meetings between spring 2022 and summer 2023. Its rate-hike campaign raised the federal funds rate a cumulative 5.25 percentage points, taking it to its highest level since 2001.2

In its official statement today, the Fed indicated it would continue watching and waiting for more data before entertaining any rate-cut decisions.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent" the FOMC said in its statement.1

What the Fed Forecasts for 2024 and Beyond

Every three months, the Fed's rate announcement is additionally accompanied by a "Summary of Economic Projections." The latest installment was released today, and all eyes are on the "dot plot" forecast it contains. The chart is so-named because it represents each Fed committee member as a nameless dot and lays out on a graph where each predicts the federal funds rate will be at the end of this year and the coming two years.

Today's dot plot shows that across the 19 Fed committee members, the median projection is three quarter-point rate cuts by the end of 2024.4 That's the same median forecast as the central bank shared in December.5

But a little finer analysis of the dot plot shows a slightly more conservative distribution. In December, the dot plot showed five of 19 committee members penciling in four or more 2024 rate cuts.5 But today's chart shows only a single central banker anticipating a fourth cut this year.4

What Today's Fed News Means for CD Rates

The federal funds rate has a direct impact on the interest that banks and credit unions are willing to pay for savings, money market, and certificate of deposit (CD) accounts. When the Fed's benchmark rate is high, interest rates for bank customers elevate as well. The reverse is true when the federal funds rate is low.

In a rate-hold situation like we have now—and where the next development is expected to be a rate cut—banks and credit unions have been slightly lowering rates. That's because CDs offer you not just a rate today, but a rate with a promise: For the full number of months or years in the term you choose, the CD's rate will be locked and guaranteed.

When it was still possible the Fed would raise its benchmark rate higher, banks and credit unions were willing to promise higher future rates. But with Fed rate cuts ultimately on the horizon, institutions don't want to get locked into CDs with yields they'll regret down the road.

Specifically, the Fed's current rate forecast for the coming three years suggests rate cuts could lower the federal funds rate by as much as 2 to 3 percentage points by the end of 2026.4 With that downward trajectory in mind, banks and credit unions are expected to keep lowering the new CD rates they offer.

Advice for CD Shoppers

Though we don't know when the Fed's hammer will fall on rates, it seems likely today's bank and credit union rates will be higher than what you can get down the road. That makes it a smart time to lock in one of today's CD rates while you can.

Though not quite as high as a few months ago, current CD rates are still remarkable. You can lock in a rate in the 5% to 5.50% range for short- and mid-term CDs (3 months to 3 years), or something in the mid-4% range for longer terms. Since these rates won't change until the CD matures, they're expected to significantly out-pay the rates you'll be able to earn on savings accounts and new CDs once the Fed begins lowering the fed funds rate.

So, while CD rates may not be quite at the peaks they reached in the fall, they still offer an excellent rate guarantee for months or years into the future.

ARTICLE SOURCES

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1. Federal Reserve Board. "Federal Reserve Issues FOMC Statement, March 20, 2024."
2. Federal Reserve Board. "Open Market Operations."
3. Federal Reserve. "Federal Open Market Committee - Meeting Calendars, Statements, and Minutes (2019-2024)."
4. Federal Reserve Board. "Summary of Economic Projections, March 20, 2024," Page 4.
5. Federal Reserve Board. "Summary of Economic Projections, December 13, 2023," Page 4.