The Federal Reserve Board (Fed) cut the federal funds rate by 50 basis points (0.5 percentage points) to a target range of 4.75 to 5 percent at its Federal Open Market Committee (FOMC) meeting on Wednesday. This marks the first cut in more than four years since the Fed set interest rates near zero during the COVID-19 pandemic. It also marks two years since the Fed began raising interest rates in March 2022 to combat inflation.
In particular, the Fed’s rate hikes have made borrowing costs higher, sending mortgage and credit card interest rates soaring. At the same time, yields on savings accounts, including certificates of deposit (CDs) and savings accounts, have soared as banks began offering annual percentage yields (APYs) for the first time in decades.
But recent interest rate cuts, with further cuts expected in the future, have ushered in a reversal when it comes to savings account yields. So, you might be asking yourself: is it still worth opening a CD? For the right CD, the short answer is yes, but it depends on your specific financial needs, not just a high APY.
Despite the decline in yields, there are still opportunities to open CDs with competitive rates now that the Federal Reserve’s first interest rate cut in four years has become a fait accompli. Here are some benefits to continuing your search and what to look out for if you’re interested in opening a CD now.
What is the benefit of opening a CD now?
With inflation currently at 2.5% nearing the Federal Reserve’s 2% target, the central bank is poised to continue cutting interest rates, though the exact pace of cuts remains a matter of speculation at this point.However, we do know that several banks have responded by reducing the APYs on a range of deposit products.
So, we expect interest rates on many high-yield savings accounts, including high-yield savings accounts, to fall significantly in the coming months — and therein lies the benefit of locking in a high-yield CD now.
Outweighing future rate cuts
Interest rates on checking, savings and money market accounts are variable and subject to change at any time, so even if you are getting a competitive rate when you open your savings account, it may be significantly lower at a later date.
In contrast, when you open a CD, you lock in the advertised rate for the life of the CD, so if you open one now while interest rates on savings accounts are still relatively high, you’re guaranteed to continue earning a high rate of return even as the Federal Reserve continues to cut interest rates and, in turn, banks begin to lower savings account yields.
Outperforming inflation
And, of course, you need to take inflation into account. Ideally, you want a savings account that beats inflation to thwart the depreciating effect of inflation on the dollar. But banks can change their APY at any time, so there’s no guarantee that a savings or money market account will consistently earn you an above-inflation rate of return.
But with a CD, you know exactly how much you’ll earn over a specific period of time. CD terms typically range from as short as three months to as long as five years, and you can choose an account that will outperform both inflation and future interest rate cuts. Longer terms, especially, can ensure that your money will continue to earn 2024 yields, even in 2025 and beyond.
What should you consider when opening a CD now?
Certainly, a high APY is the main factor when opening a CD, but there are other factors to consider as well.
Generally speaking, the main components of a CD are yield, minimum deposit, term length, and early withdrawal penalty. You’ll need to balance each of these factors to meet your specific needs.
In terms of yield, CDs offering APYs around or above 5% are particularly competitive right now.
The typical minimum deposit for a CD is $1,000, but some CDs require less and others more. You need to balance the amount you deposit with the term of the CD, since you need to consider how long you want to keep your cash in the account without withdrawing it. Unless you open a penalty-free CD, you could be penalized if you withdraw your money before the CD matures.
Additionally, if your main goal is to choose a CD that will outperform inflation and future interest rate cuts, you should look at CDs with very high yields and terms longer than one year. Shorter term CDs aren’t going to give you much of a return right now, unless you’re interested in setting up a CD ladder, which involves opening multiple CDs with different maturity dates.
“The ability to lock in a multiyear CD at a rate that will easily exceed inflation is especially appealing to retirees who are looking to generate income for specific future cash needs or to diversify their overall portfolio,” said Greg McBride, CFA, chief financial analyst at Bankrate. “But you also need to be able to live without that money for the term of the CD.”
Some particularly attractive CDs that still offer high yields even before the Federal Reserve cuts interest rates include:
- Quontic: 6-month CD, 4.60% APR
- CIBC Bank USA: 1-year CD, 4.81% APR
- Banco de Basque: 2-year CD, 4.00% annual interest
- Synchrony Bank: 3-year CD, 4.15% APR
- Alliant Credit Union: 5-year CD, 4.00% APR.
Notes: CD rates are accurate as of September 20th and are subject to change at any time.
Conclusion
Following recent interest rate cuts by the Federal Reserve, annualized yields on savings accounts, including CDs, are expected to decline further. With further interest rate cuts expected, securing high-yield CDs now can help protect you from the ongoing declining interest rate environment. Selecting CDs with terms of one year or longer can be especially helpful in achieving this goal. If you have enough cash to set up a CD ladder, now may be your best bet.
