Should You Buy a 1-Year CD Now Before the Fed Starts Cutting Rates?


The interest rates on 1-year CDs are at their highest level in more than 15 years. It wasn’t long ago when a 1.00% APY would have seemed generous, but it’s rather easy to find high-yield CDs that offer APYs of 5.00% or even higher now.

One common question I get asked these days is, “Should I open a CD now before interest rates start to fall?”

To be sure, there isn’t an easy answer to that question. Locking in an interest rate now could seem like a genius move if interest rates start to plunge, but that’s a big “if.” Here’s a rundown of what is expected to happen with interest rates between now and the end of the year, and what you should keep in mind before opening a CD.

Why you might want to open a 1-year CD now

The Federal Reserve is widely expected to start lowering rates later this year. While the interest rate policy moves of the central bank don’t directly impact the interest rates banks pay their CD customers, it’s important to note that the rates tend to move in the same direction.

This is why CD rates were near all-time lows in 2021 when the federal funds rate was set at near-zero levels. It’s also why they have climbed to their highest level since the 2008 financial crisis as the federal funds rate was rapidly increased by more than 5 percentage points during the 2022-2023 period.

The Federal Reserve is widely expected to start lowering rates later this year as inflation has fallen significantly from the multi-decade highs we saw in 2022. If that happens, it’s virtually certain that CD rates will start to trend downward, so locking in today’s 1-year CD rates could be appealing to savers who want predictable returns on their money. After all, savings account interest rates can change at any time.

One big caveat

To be clear, I’m not at all saying that opening a 1-year CD right now is a bad idea. It isn’t. If you have savings that you almost certainly won’t need for the next year, a 1-year CD could be a great place to put your money.

What I’m saying is that opening a 1-year CD specifically in anticipation of interest rates falling is by no means a guaranteed way of maximizing your income.

Nobody — not even the Federal Reserve policymakers — knows for sure if and when they are going to start lowering interest rates in 2024. It’s entirely possible they won’t lower rates at all, and in certain scenarios, they could end up raising benchmark rates even further.

In fact, at the start of 2024, the median expectation was for six quarter-percentage-point rate cuts this year. Recent economic data shows inflation staying significantly higher than expected, and rate cuts are now all but off the table until at least July. And now, the median expectation is for just one interest cut this year. There’s a real possibility that if inflation stays stubbornly high, we won’t get any rate cuts at all, or that interest rates could end up increasing between now and the end of the year. If that happens, you might come to regret “locking in” a 1-year CD rate today.

The bottom line

If you want to open a CD today to get a steady income from your savings with no risk, go for it. But before you open one because you think rates are as high as they’ll get and will only go down from here, it’s important to understand that while that is the most likely scenario, it is by no means guaranteed.

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.



Source link

About The Author

Scroll to Top