The Federal Reserve has officially lowered the federal funds rate for the first time in four years, marking the end of the central bank’s restrictive monetary policy to curb inflation.
This move, and the prospect of further interest rate cuts in the future, is expected to cause banks to offer lower yields on savings accounts, including certificates of deposit (CDs) and savings accounts. That’s why it’s advantageous to open CDs with a duration of one year or more at this time.
Unlike a savings account, when you open a CD, the advertised yield is locked in for the life of the account. Therefore, locking in a CD means you can continue to earn a high yield far into the future, even if the annual percentage yield (APY) starts to decline.
8 reasons why now may be a good time to consider long-term CDs
1. Have long-term money in your savings account
According to a March Bankrate survey, only 22% of Americans with short-term savings have a savings account with a yield of 4% APY or higher. Those with money in these high-yield accounts have likely seen their yields rise dramatically since around March 2022, when the Fed began raising interest rates.
But if some of that money is long-term money and interest rates are going to go down in the future, you might be glad you opened a long-term money CD now.
2. You have funds that you don’t need for a certain period of time.
Putting your emergency fund or other savings into a high-yield savings account is a good first step. However, if you don’t need the money during the CD’s term, a long-term CD may work better for you. CDs can typically earn a higher APY than savings accounts, which have variable APYs. Another advantage of CDs over savings accounts is that your savings APY will likely decrease if the Fed eventually lowers interest rates. However, regular CDs have a fixed APY for the length of the CD.
Make sure you don’t need these funds during the CD period. Failure to do so may result in early withdrawal penalties. You may also consider a penalty-free CD for the funds you think you will need during the term of the CD.
3. CD offers a return guarantee
There are few guarantees in life. However, the money in your CD is protected against bank failure, as long as you follow FDIC rules within FDIC limits, and you can earn a guaranteed APY as long as you keep your money in the CD for the entire period.
“If you’re interested in CDs, especially CDs with multi-year maturities, now is the time to take a hard look. Waiting won’t get you better,” McBride says.
4. 5% is an attractive yield for any investment
In more normal times, yields could be 2% to 3%, roughly keeping up with inflation.
“A 5% return is a pretty good return in the grand scheme of other investment classes and categories,” said Adam Stockton, a director at data provider Kyrinos. “From that perspective, I think the downside risk of putting money into CDs is almost certainly lower now than it was a year ago.”
Even though yields are starting to decline, you can still find long-term CDs near the 5% level. For example, you can still find 18-month CDs with APYs up to 4.75 percent.
5. If you think interest rates will fall soon, long-term CD yields are a good option.
You should not try to time the market. Also, you shouldn’t try to find the perfect time to deposit money into a new CD.
But one thing is clear. That means no one can predict future interest rate trends with 100% certainty. As just one example, look at the surprise caused by the pandemic, where interest rates quickly fell to near zero.
If you don’t want to miss out on the possibility of an even higher CD APY, you can also consider a bump-up CD.
6. A CD ladder may be useful in this environment
CD ladders are a great way to spread out CD maturity over time at different CD conditions. Traditionally, 5-year CDs have higher yields than 1-year CDs on a typical ladder.
These days, however, CDs with terms of about six to 18 months are likely to be the most profitable on the ladder.
7. Earn market-like returns without market risk
Ensuring a fixed APY for the term of the CD and being insured by the Federal Deposit Insurance Corporation (FDIC) are two ways a CD provides protection. And these days, you can get competitive returns on CDs as well.
“Overall, many people suggest that a 5% return is something of a benchmark for an entire investment portfolio,” Stockton says. “So if you can get that return on just the cash in your portfolio, that’s a pretty good deal.”
If you have FDIC insurance, make sure you are always within FDIC limits and following FDIC rules.
8. Retired or about to retire
If you are already retired or will be retiring in the near future, you should consider CDs and lock in your rates now. In this way, it may be possible to get ahead of long-term inflation. There is no guarantee that inflation will remain in the 2% range. This may increase in the future.
conclusion
Long-term storage CDs are a good choice for expenses you won’t need during the CD’s expiration date. By securing a longer-term CD now, you may be able to maintain purchasing power even if interest rates drop in the future. However, there are other types of investments that may be better suited to your financial goals, depending on your risk tolerance and time horizon.
– bank rate marcos cabello Contributed to updating this article.
