How a different kind of CD can protect your money from falling interest rates


Worried that falling interest rates will mean less money in your savings account? Even if rates go down after the upcoming Fed meeting, you can secure a steady return by buying a low-commitment certificate of deposit (CD).

With a traditional CD, you can't withdraw money for a predetermined length of time – like six months, 12 months, or even five years – without paying for the privilege. But some banks are offering no-penalty CDs that do away with that caveat. Savers benefit from a fixed interest rate for a set period, and you can withdraw without penalty.

"In a falling rate environment, it's a good option," said Ken Tumin, founder of, which tracks savings rates.

Falling interest rates can affect your savings

Savings accounts don't usually provide much interest. The average traditional savings account pays roughly 0.1% annually, according to the FDIC. That's 10 cents for every $100 after one year.

High-yield savings accounts, which are generally offered by internet-only banks or subsidiaries, make you more money. Right now, rates hover around 2% at Ally bank, Barclay's, and Discover, so savers earn about $2 for every $100 annually. If your emergency fund holds $10,000, you'll earn about $200 each year in a high-yield account.

What is a high yield savings account?

The Fed cut rates in July for the first time since 2008, though, and high-yield account rates have started falling too. Goldman Sachs and Ally cut their savings rates by 0.1% in June. Ally dropped rates again in August, from 2.1% down to 1.9%, and market observers expect more rate cuts in the next few months. That means, even with a high-yield account, you could earn less interest on your savings.

That can make CDs a more attractive option.

CDs help you lock in a rate

No-penalty CDs generally offer lower rates than classic ones. A classic CD can earn you 2.35% for 12 months at Ally, while a high-yield savings account at Ally earns you 1.9%. An Ally no-penalty CD falls in between: As of September 10, savers can lock in 2.1% interest for 11 months if you put in at least $25,000.

If the Fed cuts rates two more times and savings rates fall to 1.4% or so, a 2.1% CD rate will look great by comparison.

No-penalty CDs are offered by online banks including Goldman Sachs (through its Marcus brand), CIT Bank, and PurePoint Financial. Each product has its own details, such as minimum deposits or potential monthly fees. Also, in many cases, consumers who raid their no-penalty CDs must withdraw their whole balance, as partial withdrawals are not allowed. This could backfire if interest rates suddenly rise.

However, Tumin thinks rates won't go up for at least two years, even if the Fed were to suddenly reverse course, which he says is highly unlikely in a presidential election season. While banks respond quickly to lower savings rates when the Fed lowers its rate, there is usually a time lapse of a year or so before banks pass along higher rates to consumers. It's like the way prices at the pump rise quickly when oil prices rise, but fall much more slowly when the price of oil drops. Economists call this "asymmetric price adjustment."

Generally depositors can't withdraw money put into a no-penalty CD for the first six days, and withdrawals can take several days, too, so your money isn't as liquid as it is in a traditional savings account. Still, for most people, FDIC-insured no-penalty CDs are a good option if you want a safe place to park your emergency savings and earn a little extra in interest while you wait to see what the Fed does next.

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