For much of 2023, a certificate of deposit (CD) was a lucrative tool for boosting savings and safeguarding principal. CD interest rates had surged due to high inflation and record-high interest rates, potentially providing 6% or 7% interest rates compared to the minimal rates of 1% or lower in 2020 and 2021. However, with the evolving economic landscape and talks of a potential cut to the benchmark interest rate, savers are now in a dilemma—whether they should open a CD or not before the January Fed meeting.
Rates are still high
One compelling reason to consider opening a CD before the Federal Reserve
meeting is the persistently high CD interest rates. Historically, long-term CDs tended to offer higher rates than short-term ones. However, the current trend has seen short-term CDs offering equally, if not higher, rates. Thereby, savers can still earn significantly higher returns by locking in a CD, regardless of its term.
Rates have likely plateaued — and may drop soon
While CD rates are currently elevated, many anticipate a potential decline. Even if the Fed doesn’t cut rates in their January meeting, a reduction is expected later in the year, possibly as soon as March. This could result in a corresponding decrease in CD rates. By acting now, savers can capitalize on the high rates before they potentially diminish.
You'll earn more interest than the alternatives
In comparison to regular savings accounts with minimal interest rates, high-yield savings accounts do offer competitive rates. However, the variability of their rates, coupled with the potential for rate cuts, may make CDs a more favorable option for many savers. CDs lock in the interest rate until the account matures, providing a level of security against the fluctuating rates of high-yield savings accounts.
The bottom line
As the economic landscape evolves, the window of opportunity to earn high returns from CDs may soon close. If inflation remains in check, the Federal Reserve could proceed with interest rate cuts, subsequently reducing the returns on CD accounts. Therefore, acting now to secure a high rate and potentially earn more than alternative options presents a compelling proposition for savers. Ultimately, the decision to commit funds to a CD is personal, and individuals are encouraged to conduct thorough research and compare all available options before making a decision.