American savers are facing a significant decision this September as the Federal Reserve weighs its first interest rate increase since July 2023, with the choice between a certificate of deposit (CD) and a high-yield savings account likely to become more important.
Financial markets are pricing in slightly better than even odds of a quarter-point rise at the Fed’s meeting on September 15 and 16. The forecast could still change as further economic data is released, but the prospect of tighter monetary policy has already sharpened the debate over where savers should keep their money.
The federal funds target range currently stands at 3.5% to 3.75%. At the Fed’s July meeting, three officials backed an increase, while the majority voted to leave rates unchanged. It would be the first rate rise since July 27, 2023, when the central bank lifted its target range to 5.25% to 5.5%.
Which account is better this September?
Both account types can offer considerably better returns than a conventional savings account, where average rates remain below 0.40%. The better choice depends largely on whether a saver values certainty or access to their cash.
CDs generally offer higher rates than the leading high-yield savings accounts, although the exact return depends on the length of the term. The rate is fixed when the account is opened, giving savers a guaranteed return regardless of what happens to interest rates during the contract.
That certainty could prove valuable if the Federal Reserve raises rates once and then pauses, or if rates later fall. A CD also removes the need to monitor changing offers, allowing money to earn a set return until the account reaches maturity.
However, the money is usually tied up for the duration of the CD. Withdrawing it early can trigger a penalty, which may consume some or all of the interest earned. Savers should therefore avoid committing funds they may need for emergencies or unexpected expenses.
A high-yield savings account offers greater flexibility. Money can normally be withdrawn without the early-access penalty associated with a CD, making the account more suitable for an emergency fund or cash that may be needed at short notice.
Its interest rate is variable, however. If rates fall, the return on the account can be reduced. If the Fed begins a fresh cycle of rate increases, the opposite may happen, allowing high-yield savings customers to benefit while the holder of an existing fixed-rate CD remains locked into the original deal.
Online banks are often able to offer more competitive rates than traditional banks with branches, although the same can apply to CD products. Savers should also check minimum deposit requirements, withdrawal rules, account fees and whether deposits are covered by federal insurance before opening an account.
Splitting savings between a CD and a high-yield account
Using both account types could offer a compromise. Money that must remain readily available can be placed in a high-yield savings account, while funds that are unlikely to be needed soon can be committed to a CD to secure a fixed return.
That approach can provide a degree of protection if rates move in either direction: accessible savings remain positioned to benefit from a rise, while the fixed portion is shielded from a possible fall.
There is no single answer for every saver. Those seeking the highest guaranteed rate and able to leave their money untouched may favour a CD, while anyone prioritising access and the possibility of benefiting from further rate increases may find a high-yield savings account more suitable.
