The APYs for CDs and high-yield savings accounts have increased quite a bit ever since the Federal Reserve started to hike interest rates in 2022. Some people stored their money in these accounts for guaranteed returns, but one person on Reddit found a discrepancy between Fidelity’s CDs and their savings account.
“My high-yield savings account is giving me 4% APY, while all CDs I find in Fidelity are below this (except those with 10+ year maturity). Does this mean that high-yield savings accounts are outcompeting CDs? Or am I missing something?”
There is a key difference between these two financial products that some Redditors pointed out in the comments.
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Fixed Rates Vs. Variable Rates
Fidelity CDs have lower yields because CD issuers can see the writing on the wall. The Fed will likely lower interest rates next week, and the economy may be due for several rate cuts. Each of those rate cuts results in a lower APY for various bank accounts, so CD rates have dropped in anticipation of that scenario.
Fidelity and other financial institutions don’t want consumers to get high yields for short-term maturities since rates are due to go down. However, they have higher yields for the CDs that will mature in 10+ years due to the uncertainty. It’s also more attractive for financial institutions to lock up your money for that long.
Meanwhile, high-yield savings accounts have variable APYs. These interest rates can change at a moment’s notice. If the Fed reduces interest rates by 0.25%, your high-yield savings account may also go down by 0.25%.
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Higher Rates Vs. A Guaranteed Rate
The high-yield savings account doesn’t offer any guarantees. However, you are locked into an APY for the duration of a CD’s term. That is a key detail to consider when deciding between these two financial products.
“You are missing that the high-yield savings account’s interest rate could drop to 0% next year, while the CD rate is (generally) locked in for the duration,” one Redditor said in the comments.
The same rule applies to money market accounts. Even though these accounts have high yields now, that can change at any time. CDs and bonds offer more certainty. If high-yield savings rates dropped by 2% or more over the next year, a CD may have been the better choice in hindsight.
The Likelihood Of Rate Cuts Affects APYs
The overwhelming consensus is that some rate cuts are due. Financial institutions don’t know with certainty how many times the Fed will cut rates over the next few years, but multiple rate cuts over the next year seem likely.
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That’s the main reason a discrepancy exists between CDs and high-yield savings accounts. One Redditor offered a rule of thumb that’s good to keep in mind for anyone who is considering these financial products.
“Rate cuts are expected soon, so you will need to accept a lower interest rate to lock in the rate on a CD. When interest rates are expected to increase, the opposite will occur,” the commenter said.
Other Redditors also said that they are seeing lower CD rates, especially with the Fed’s decision looming. One commenter made an additional suggestion that went beyond rates for people who aren’t sure which financial product to use.
“If you know you’ll need the cash at a certain time in the future, a CD is the way to go,” the commenter said. “If you don’t know when you’ll need this cash, get a high-yield savings account. If you don’t really need the cash, then you probably need to look at investing to get a higher return in the long run.”
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