The Best Time for High CD Rates Might Be Right Now

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Rates on certificates of deposit have started to decrease this year. If that trend continues, you might have a savings decision to make: Should you lock in CD rates now or wait?

Yields on savings accounts and CDs are some of the highest in more than a decade — above 5% at best, as of mid-February — but there are signs that these rates may not last. CDs are federally insured like savings accounts are, but their rates are fixed for the term you choose, generally from three months to five years.

Getting a CD with a yield multiple percentage points higher than the national average might be a boost for some of your savings.

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CD rates: Their rise — and slow fall?

Since March 2022, the Federal Reserve raised its benchmark interest rate 11 times to curb inflation. Banks and credit unions generally take their cue to follow the direction of Fed rate changes. As a result, the highest CD rates soared from below 1% in January 2022 to their current heights of above 4% or 5% depending on term length. In contrast, CDs’ national average rates have remained below 2%.

However, CD yields might’ve peaked. The Fed’s last rate increase was in July 2023, and the Fed expects to begin rate cuts this year, according to its mid-December projections. But it’s unclear when.

“We expect that the Fed will lower its benchmark rate later in 2024, as early as March, but more likely, markets indicate later in the year, perhaps at a meeting this summer,” Rob Williams, managing director of financial planning at Charles Schwab, said in an email. Market rates for new brokered CDs longer than one-year terms have fallen modestly in part due to the expectation of rate cuts, he said.

High-yield CD rates outside brokerages have also seen dips. Nearly two dozen online banks and credit unions started dropping rates incrementally across many CD terms from December 2023 to January 2024, according to a NerdWallet analysis. For example, the midpoint for one-year CD rates in this group dropped from 5.10% to 5.00% since September 2023, while five-year CD rates stayed the same.

Traditionally, savers can expect that the higher the CD term, the higher the rate you can get. But this trend hasn’t been the case since January 2023 when short-term CDs, such as one-year rates, surpassed long-term CDs (such as five-year rates), based on NerdWallet data.

“Markets aren’t expecting a dramatic drop in rates in 2024, but for investors looking to lock in short-term rates now, it’s likely a good time,” Williams said.

The time and place for CDs

CDs can be best for earmarking funds for a large upcoming purchase, such as a car or home, or to maintain a guaranteed return for some of the cash portion of your investments.

Since you give up access to funds during a CD’s term, CDs aren’t for everyday savings or an emergency fund. Withdrawing early from a CD usually means paying a penalty of at least several months of interest. CDs also don’t have the highest returns, so they’re not for long-term savings to grow your money, such as for retirement. Top CD yields are higher than the current inflation rate of 3.1%, so using CDs to protect some savings from inflation is possible now — but not always.

“A diversified portfolio of stocks, backed up by the stability and diversification of cash and bonds, based on an investor’s time horizon and risk tolerance, has generally been the most effective way to outpace inflation over time,” Williams said.

Choosing where you open CDs is important, too. Online banks and online credit unions tend to have some of the best CD rates and are generally accessible to anyone in the U.S. CDs at investment firms, known as brokered CDs, can offer competitive yields, but you need a brokerage account and some investing know-how to navigate the buying process. Community credit unions can have high yields too, but watch for membership restrictions and minimum or maximum deposit requirements.

Big traditional banks tend to have some of the lowest CD rates. They might offer promotional CDs with unusual terms such as seven or 13 months. Read the fine print since these CDs can automatically renew into more standard terms with lower rates.

Hedging bets instead of timing CDs

If you’re hoping for a crystal ball to know how much and how soon CDs will fall, don’t hold your breath. Even the first Fed rate cut may depend on inflation.

“One strategy that takes the pressure off timing CDs is a CD ladder, which consists of opening several CDs of staggered term lengths such as one-year, two-year and three-year terms. You can redeem CDs at regular intervals and decide each time whether to renew in a long-term CD or withdraw. Given current rates, though, you might shorten your ladder, such as terms of three, six and nine months and one year, to take advantage of the highest yields.

If juggling multiple CDs sounds complicated, you can also open a no-penalty CD, allowing you to redeem early, then choose another CD or a different investment.

Compare CDs with other options

For regular access to funds, consider high-yield savings accounts while rates remain high. For comparable and stable returns to CDs, but more investing knowledge required, there are Treasury bills and bonds, which are backed by the full faith and credit of the U.S. government. Willams sees money market funds, which hold Treasury bills and other short-term, low-risk investments, as another cash investment option that can sell generally within 24 hours to access cash.

If your short-term goals align best with CDs, consider locking in high rates sooner rather than later.

Dive into the world of CD rates from a fresh perspective. As the Federal Reserve adjusts its interest rates, the landscape for CD investments is shifting. While rates have soared to impressive levels, signs suggest that a decline may be on the horizon. The traditional view of long-term CDs offering higher rates than short-term CDs has been turned upside down, with short-term options now outpacing their long-term counterparts.

To navigate this ever-changing terrain, consider alternative options like high-yield savings accounts or Treasury bills for comparable returns with potentially more flexibility. As the market anticipates rate cuts, exploring a CD ladder strategy or opting for a no-penalty CD could offer a balanced approach to managing your investments.

Ultimately, the decision to lock in CD rates now or wait depends on your financial goals and risk tolerance. By analyzing the current market trends and exploring various investment options, you can make an informed choice that aligns with your unique financial situation.

In today’s uncertain economic climate, many individuals are looking for safe and secure investment options to protect their hard-earned money. One such option that has gained popularity in recent years is investing in certificates of deposit (CDs). CDs are a type of savings account that typically offers higher interest rates than traditional savings accounts in exchange for locking in your money for a set period of time.

One of the key factors that determines the interest rate you receive on a CD is the current market conditions. When the economy is strong and interest rates are high, CD rates tend to be more attractive. On the other hand, when the economy is in a downturn and interest rates are low, CD rates may not be as favorable.

Given the current economic climate, it may surprise you to learn that now might actually be the best time to take advantage of high CD rates. In this article, we will explore why this might be the case and how you can make the most of this opportunity to grow your money safely and securely.

**The Impact of the Federal Reserve**

One of the primary factors influencing CD rates is the Federal Reserve, the central banking system of the United States. The Federal Reserve sets the benchmark interest rate, known as the federal funds rate, which in turn affects the interest rates offered on various financial products, including CDs.

In response to the economic impact of the COVID-19 pandemic, the Federal Reserve slashed interest rates to near-zero levels in 2020 to stimulate economic growth and support financial stability. While this move was necessary to prevent a full-blown economic crisis, it also had the unintended consequence of lowering CD rates across the board.

**Opportunities in the Current Market**

Despite the Federal Reserve’s efforts to keep interest rates low, there are still opportunities to find high CD rates in today’s market. While traditional brick-and-mortar banks may offer relatively low rates, online banks and credit unions often provide more competitive rates to attract customers.

Additionally, some financial institutions offer promotional CDs with higher rates for a limited time. By keeping an eye out for these special offers, you can take advantage of temporary spikes in CD rates and maximize your returns.

**Benefits of Investing in CDs**

Investing in CDs offers several benefits that make them a valuable addition to any investment portfolio. Some of the key advantages of CDs include:

– Safety: CDs are considered a low-risk investment because they are FDIC-insured up to $250,000 per depositor, per institution. This means that even if the bank fails, your money is protected.

– Guaranteed Returns: Unlike the stock market, where returns are subject to market fluctuations, CDs offer a fixed rate of return over a set period of time. This predictability can provide peace of mind in volatile economic times.

– Diversification: By including CDs in your investment portfolio, you can diversify your risk and balance out higher-risk assets with a more stable investment option.

**Tips for Maximizing Your CD Returns**

If you’re considering investing in CDs to take advantage of high rates, here are some tips to help you make the most of your investment:

– Shop around for the best rates: Don’t settle for the first offer you come across. Take the time to compare CD rates from different financial institutions to find the best deal.

– Consider the terms: Pay attention to the maturity date, early withdrawal penalties, and renewal options when choosing a CD. Opt for a shorter term if you think interest rates will rise in the near future.

– Ladder your CDs: Instead of investing all your money in one CD, consider laddering your investments by spreading them out over multiple CDs with different maturity dates. This strategy can help you take advantage of higher rates while maintaining liquidity.

**Conclusion**

In conclusion, the best time for high CD rates might be right now, despite the current economic conditions. By researching the market, comparing rates, and exploring promotional offers, you can find opportunities to grow your money safely and securely through CDs. Keep in mind the benefits of investing in CDs, such as safety, guaranteed returns, and diversification, and follow the tips provided to maximize your CD returns. With a strategic approach to investing in CDs, you can make the most of the current market and secure your financial future.

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