The Fed Might Not Lower Interest Rates in 2024. Here's What That Means for CD Rates

Recent inflation data has been a little higher than expected. In March, the Consumer Price Index, or CPI, grew by 3.5% over the past year, which was higher than the expectation of 3.4%. Core CPI, which excludes certain volatile items, was higher, as well.

Not only has inflation been hotter than anticipated, but it is still significantly higher than the Federal Reserve’s 2% target. And until inflation is clearly trending down toward that level, especially while the unemployment rate is low, it will be difficult for the Fed to justify lowering interest rates.

While CD interest rates aren’t directly linked to CD rates, they tend to move in the same direction. So, here’s what the most recent expectations are for Federal Reserve interest rate cuts, and what it could mean for CD rates.

Rate cut expectations have come down considerably

At the start of 2024, the median expectation among investors was for six quarter percentage-point rate cuts, according to CME Group’s FedWatch tool, which analyzes derivatives markets to evaluate expectations. In other words, investors were expecting the benchmark federal funds rate to fall by 1.50% by the end of this year.

Now, expectations are far lower. As of April 24, the market is pricing in a 67% probability of just one or two rate cuts this year. And there’s a significant chance (13%) of no rate cuts at all before the end of 2024. Of course, these are just predictions by investors, and nobody knows for sure. But this is what the expectations are right now.

What it could mean for CD rates

CD interest rates are not directly tied to the federal funds rate, or to any other benchmark interest rate. But they certainly tend to move in the same direction.

CD rates are currently at their highest level since prior to the 2008 financial crisis. They have risen significantly over the past two years as the Fed aggressively raised the federal funds rate from near-zero levels to a target range of 5.25%-5.50%. It wasn’t long ago that a 1-year CD with an APY greater than 1% was tough to find – now some of our favorite banks have 1-year CD rates of 5% or higher.

So, the short answer is that fewer rate cuts would likely keep CDs at their elevated levels for longer. The same can be said for savings account interest rates.

Having said that, there’s one important concept to keep in mind. I won’t turn this into too much of an economics lesson, but one rule of thumb is that shorter-term CD rates are generally governed by current benchmark interest rates, while longer-term CD rates are more heavily influenced by expectations of future interest rates. This is the main reason why 1-year CDs generally have higher yields than 5-year CDs right now. Historically, it is the other way around. But the expectation is that over the next few years, rates will come down substantially.

So, when the Fed finally ends up cutting rates, you’re likely to see a more immediate impact to shorter-term CDs. As rate expectations start to change, that’s when you’re likely to see longer-term CD yields start to fall.

No way to know for sure

A final point is that nobody knows for sure what the Fed will end up doing. At the start of 2022, virtually nobody (including the Federal Reserve members themselves) were predicting interest rate increases anywhere near what ended up happening. It’s entirely possible that the actual trajectory of Fed rate cuts will be significantly higher or lower than the current expectations, so keep this in mind when deciding on the best money moves for you.

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