One of the biggest debates in banking and personal finance in 2024 is if now is a good time to open a CD. As of May 28, 2024, the best certificates of deposit (CDs) are paying interest rates of 5.00% APY or higher. You might be tempted to open a CD and lock in a high APY for one year or more.
But CD investors are also looking at the latest moves from the Federal Reserve. So far in 2024, the Fed keeps…not cutting interest rates. This is not what many investors had expected. If interest rates stay this high, you should not be in a big rush to open a CD.
Let's look at a few reasons why you should open a CD (or not) based on the latest Fed interest rate decisions.
The Fed hasn't started cutting interest rates (yet)
Back in December 2023, the conventional wisdom on Wall Street (and here at The Ascent) was that the Fed was likely to cut interest rates in 2024.
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But much to the surprise of many economic forecasters, the Fed has not cut interest rates (so far) in 2024. Inflation has stayed a bit higher than expected, which has prompted the Fed to leave interest rates "higher for longer."
Why interest rate cuts are bad for savings accounts
Falling interest rates would be bad news for savings accounts, because savings account APYs go up and down along with the latest changes to the Fed's federal funds rate.
But CD rates are fixed. If you open a CD, the bank is agreeing to pay you that guaranteed rate of interest for the full length of the CD's term. If you open a 1-year CD at 5.00% APY (for example), you will get 5.00% APY for the full 12 months -- even if the Fed cuts interest rates over the course of that year.
How a Fed rate cut would affect your CD and savings accounts
The fixed rates on CDs can make them a better place to keep your savings than savings accounts. And no one knows for sure when (or if) the Fed will cut interest rates, but if you are fortunate enough to get the timing right, your CD can give you a fixed yield that ends up being higher than the best savings accounts or money market accounts.
For example, the Fed's next meeting to discuss interest rates is June 11-12, 2024. Let's say that you open a 1-year CD on June 10 at 5.00% APY, and then the Fed announces on June 11 that it's cutting interest rates by 25 basis points (0.25%). Because you already locked in your money with a 1-year CD, you will still get 5.00% APY on your savings for the next 12 months. But a typical high-yield savings account might immediately reduce its APY from 5.00% to 4.75% APY after a Fed rate cut announcement.
When is the right time to open a CD?
But what if the Fed leaves interest rates "higher for longer" for the rest of 2024, or even decides to raise interest rates? That could make a savings account a better deal than a CD, because you could get similarly high (or better) APYs, without the risk of early withdrawal penalties.
The right time to open a CD is ultimately up to you. It depends on your personal financial goals, risk tolerance, and how much cash you have in the bank. Don't use a CD to hold your emergency fund -- any emergency savings should be liquid and easy to withdraw in case you need that money tomorrow. But if you want to lock in a favorable APY and you're confident that you can leave the money alone for the full length of the term, any time can be the right time to open a CD -- regardless of the Fed's latest statements.
And even if you can't manage to time the Fed's interest rate decisions perfectly, how much money will you really lose? The Fed usually cuts interest rates by 25 basis points (0.25%) at a time, so you might only miss out on 0.25% of additional yield on your savings. Unless you are managing hundreds of thousands of dollars, that doesn't add up to a huge difference.
Bottom line
The best CDs are paying 5.00% APY or higher. Unless you believe that the Fed will raise interest rates in the near future, now could be a fine time to open a CD. Or if you want more flexibility for your cash, with no early withdrawal penalties, open a savings or money market account instead.
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