As the Fed raised interest rates over the past year-and-a-half to combat inflation, the payouts on some CDs reached a decades-long high. Indeed, plenty are paying annual percentage yields of upwards of 5% — and you can see some of the highest CD rates you may get now here. But what’s next for CDs?
Last week at one of its eight annual meetings, the Fed once again held rates steady — and data from an October 2023 Bankrate survey revealed that 94% of economists believe the Fed could begin cutting rates in 2024. That said, here’s what pros say will happen to CD rates in the coming months:
Prediction 1: ‘Yields are pretty close to peak now’ and any rate changes will be ‘slight.’
“Yields are pretty close to the peak now so unless the Fed hikes rates again in December, any changes between now and year end will be slight,” says Greg McBride, chief financial analyst at Bankrate.
Prediction 2: ‘The highest rates will be for this economic cycle.’
“While we have had very strong GDP data, we’ve also seen some good progress on inflation. We’ve come from a high of 9.1% to 3.7% in September and if inflation is less of an issue, the Fed won’t need to raise rates given they’re already restrictive,” says certified financial planner Chad NeSmith at Tobias Financial Advisors. “The Fed is planning to hold rates at this level while the higher cost of borrowing works through the economy.”
He adds: “The market seems to think this is going to be the highest rates will be for this economic cycle. For the most part, CDs are a good instrument for investments over a short term time horizon and timing this would be difficult and not advisable.” (See some of the highest CD rates you may get now here.)
Prediction 3: It’s possible yields ‘could also start to go down.’
It’s hard to predict exactly what will happen, but Lionel Poudevigne, head of consumer deposit pricing at KeyBank says, “One thing we learned in the last 3 years is that things can change rapidly. We do know where rates are today and they’re the highest they’ve been in almost 20 years. Could they increase some more? Sure. They could also start to go down.”
Prediction 4: Now it ‘a great time’ to lock in rates for many of you.
If you’re CD-curious, you’ll want to act swiftly, some pros say. “If you’re approaching retirement or in retirement and looking to lock in a predictable stream of interest income, now is a great time to be doing that as yields are the best we’ve seen in more than 15 years and there might not be much more improvement to come,” says McBride.
Prediction 5: While short-term CD rates will hold steady, there may be some upward movement on long-term CDs
For a while now, banks have focused on attracting deposits with short-term CDs as opposed to long-term CDs. “Short term CD rates have been rising some in the past couple of months as banks compete for deposits,” says Ken Tumin, founder of DepositAccounts.com. Short-term CD rates are most influenced by the federal funds rate, says Tumin — and with the Fed holding rates steady, he predicts there will be little change in short term CD rates.
But Tumin says long-term CD rates are influenced more by the bond market than the federal funds rate. “The yields of Treasury notes have been rising in the last couple of months and that has been putting upward pressure on long-term CD rates since long-term CDs compete with Treasury notes for investor money,” says Tumin. Basically, his takes is that short-term rates will likely hold steady but there’s room for long-term rates to incur small increases.
But don’t get a CD if it doesn’t fit your plans
“Getting a CD requires careful consideration because you’ll give up access to your money for a fixed period of time — and if money is withdrawn before the CD term ends, you’ll usually pay a penalty. If you want to save toward a specific goal like a car or down payment on a home, a CD can be worth considering,” says Melissa Lambarena, personal finance expert at NerdWallet.
For those looking for better places for their cash, Tumin says the first place to consider is online savings accounts, where yields are as high as 5.40% APY. “Once a saver has an online savings account, CDs can be used to boost the overall yield of one’s savings. By using CD ladders, savers don’t have to worry about trying to time CD purchases based on the current state of interest rates,” says Tumin. (See some of the highest savings rates you may get now here.)
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