What lower inflation and Fed rate cuts could mean for I Bonds, CDs and savers

Savers who relished higher rates already are experiencing a bit of a letdown now that the Federal Reserve is on its interest rate-cutting path.

While it's still possible to snag solid rates on a certificate of deposit, some of the best deals this year were offered back in January. And many experts warn that rates are likely to come down further in the months ahead.

Right now, the highest promotional rate on a one-year certificate of deposit is 4.75%, according to Bankrate.com data. That's down from the highest offer of 5.66% in January. The same's true for promotions on five-year CDs, which now top around 4.25%, down from 4.75% in January.

To be sure, average rates are far lower than promotional rates. The average one-year CD rate is 1.98% currently. The average five-year CD rate is 1.42%, according to Bankrate.com.

"Deposit rates have started to come down a little bit, but they're still elevated," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com. But, again, people will have to shop around for the better promotional rates.

Shopping around for a CD is key

The story with finding high-yields on savings accounts and CDs remains the same. Savers need to scan the ads, review the postcards being sent to your home, and check out the online outlets for high-yielding promotions. Not shopping around can mean that you're going to be stuck with some pretty low rates.

Reading the fine print remains essential: What is the penalty if you need to withdraw the money before the CD matures? Not all penalties for an early withdrawal are the same. The penalty is likely to be bigger if you take out a five-year CD instead of a one-year CD.

Will the CD automatically renew — often at a far lower rate — if you don't withdraw the money at maturity? Are you dealing with a callable CD? Meaning that you'd risk the bank forcing you to redeem the CD earlier than the maturity date if interest rates fall drastically.

Does the CD special involve bringing so-called "new" money to an institution? And not just transferring money from checking at the same bank into a high-paying CD? What's the minimum amount you'll need to set aside in the CD to get the highest yield?

All that said, some attractive rates remain on the market in early October.

The highest nationally available, FDIC-insured rates right now, according to Rossman's data, include a one-year CD at Limelight Bank and Goldwater Bank, both online banks, at 4.75% and a five-year CD at Goldwater Bank at 4.25%.

Detroit-based Ally Bank, also an online bank, has a one-year CD at 4.25% and a five-year CD at 3.6%.

Michigan State Federal Credit Union, for example, is offering a rate of 3.75% for a one-year CD and 3.25% for a five-year CD.

Many times, shorter-term CDs, such as one-year certificates of deposit, are offering higher rates than longer-term CDs, such as a five-year CD. Some say that many banks don't want to lock in higher rates for several years when many anticipate that the Federal Reserve will cut short term interest rates a few more times in 2024 and then again in 2025.

Barclays offers a CD with no minimum deposit at a 5.1% yield for six months. But you will have to deposit some money within 14 days of opening the CD to maintain the account.

Synchrony has a nine-month CD at 4.5% with no minimum down.

Fed Chair Jerome Powell: 'Growing confidence' inflation cooling, more rate cuts possible

Why savers might want to lock in some higher rates now

"Online banks started cutting their CD rates early this year as expectations of Fed rate cuts grew," said Ken Tumin, founder of rate tracking site DepositAccounts, now owned by LendingTree.

Yet Tumin noted: "Rate cuts on CDs and savings accounts have accelerated since the September Fed rate cut."

The Fed cut short term rates by a half of a percentage point on Sept. 18, following a series of 11 rate hikes that kicked off in March 2022 and ended in July 2023. For more than a year, the Fed did not cut or raise rates as the fight against inflation continued. The Fed has said inflation is likely to continue to cool.

Some analysts expect two more smaller rate cuts — each of a quarter of percentage point — at one Fed meeting on Nov. 6 and Nov. 7 and another meeting scheduled for Dec. 17 and Dec. 18.

And more rate cuts are expected in 2025.

This year, the average online one-year CD peaked at an annual percentage yield Jan 1 at 5.35%, Tumin said, but that average fell to 4.96% by June 1.

By Oct. 1, he said, the average online one-year CD sat at 4.38%.

"Savers should consider locking in rates using online CDs and credit union CDs with terms of at least one year," Tumin said. "You can still easily get over 4%. That may not last much longer if the Fed keeps cutting rates."

Someone who is fearful of needing the money before the CD matures, he said, should look for no-penalty CDs.

Savers didn't have much incentive to save just three years ago when they were looking at one-year CDs with average yields of 0.14% in late 2021. The top yields then included promotional rates of just 0.67% on a one-year certificate of deposit, according to Bankrate.com data.

By late 2022, the average one-year CD yield had climbed up to 1.36%, according to Bankrate.com. The best deals offered two years ago on a one-year CD would have had a yield of around 4.75%.

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What's next for I Bond rates?

One inflation-fueled hot spot for savers involved Series I U.S. Savings Bonds. I Bonds bought and issued before Oct. 31 have a 4.28% annualized rate for six months. These bonds carry a fixed rate of 1.3% that will remain for the 30-year life of the bond.

I Bonds are bought online at www.treasurydirect.gov with a minimum savings of $25. You cannot cash or redeem these bonds until after 12 months from when you bought them. Another point to note: If you cash in the bond in less than five years, you lose the last three months of interest. The TreasuryDirect site gives an example: "If you cash in the bond after 18 months, you get the first 15 months of interest."

"The fixed rate will likely fall slightly," Tumin said. "Also, the inflation component will surely be lower due to the recent disinflation."

Savers who haven't maxed out yet for 2024 for their I Bond purchases would likely want to consider buying before Oct. 31 to lock in a better rate, according to Tumin and other experts.

David Enna wrote some similar advice on his site Tipswatch.com. "We are just a month and a few days away from the Nov. 1 rate reset for the U.S. Series I Savings Bond, when both the 1.3% fixed rate and 2.96% variable rate are likely to fall," Enna stated.

Enna predicted that the new composite rate as of November will likely be about 3.1% or less — down from 4.28% currently. Someone who bought I Bonds before Oct. 31 would be able to lock in that 4.28% rate for six months after buying the bond. Again, the fixed rate of 1.3% would remain with the life of the bond.

It can be hard to predict what Treasury will do with a fixed rate at a time when interest rates are expected to fall in the months ahead.

"The fixed rate portion is the big unknown," Enna told the Detroit Free Press.

He explained that the variable inflation-based rate will be set Oct. 10 once the September inflation report is released by the U.S. Bureau of Labor Statistics.

The inflation-based component could be something like 1.8%, Enna said, which would end up making the new composite rate right around 3%.

"There's an outside possibility that the fixed rate holds at 1.3%, but my gut tells me it will be lower," Enna said.

If the fixed rate is lower, the composite rate for I Bonds issued from Nov. 1 through April 30, 2025, would be lower than the estimated 3%.

Enna expects the fixed rate will remain at least at 1% or higher into next year.

During a calendar year, an individual could buy up to $10,000 in electronic I Bonds. Some taxpayers who are owed a tax refund also could buy up to an additional $5,000 in paper I Bonds in the same calendar year, if they filed the correct paperwork with their tax returns. But that tax refund option only goes until Jan. 1, 2025.

I dug up a tidbit and wrote a column in late August that broke news that the TreasuryDirect program would be changing things up in 2025 when it came to tax refunds and a way to set aside that extra $5,000 a year.

The end of newly issued paper I Bonds and the extra $5,000 in savings is just around the corner. Beginning Jan. 1, you no longer will be able to buy up to an extra $5,000 in paper I Bonds with your tax refund, according to news from TreasuryDirect.

TreasuryDirect called the tax-related program costly, and pointed out that sending paper bonds in the mail triggered potential problems with fraud, theft, loss and delays.

While most people filed their 2023 tax returns already, many taxpayers requested an extension to file their 2023 federal income tax returns and face an Oct. 15 deadline for filing. If taxpayers with an extension ultimately are owed a tax refund, they could still use Form 8888 to direct up to $5,000 of their refund into I Bonds.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

This article originally appeared on Detroit Free Press: What Fed rate cuts ahead could mean for CDs, I Bonds and savers