Weighing the Cut: Should You Lock in a CD Rate Now?

CDs tend to pay higher rates than traditional savings accounts in any economic environment. Rido/Shutterstock

The Federal Reserve in December slashed interest rates by 0.25 percent, marking the third time it has cut rates this year. And even though the central bank has hinted it may lower rates at a slower pace next year, it still signaled two potential rate cuts for 2025.

So why does this matter to your wallet? When the Fed cuts interest rates, banks tend to do the same on annual percentage yields (APYs) that they pay on savings accounts and certificates of deposit (CDs).

But, in general, CDs tend to pay higher rates than traditional savings accounts in any economic environment. Longer-term CDs also tend to pay higher rates.

And, today, you can still find banks offering CDs with APYs of around 5 percent—nearly double the current rate of inflation.

Here’s how a 4.75 percent APY would add up based on term length and an initial deposit of $5,000:

• three months: $5,058.35
• one year: $5,237.50
• three years: $5,746.88
• five years: $6,305.80

So now may be a good time to lock in a strong yield before rates potentially fall in the future.

What Is a CD, and How Does It Work?

A CD allows you to deposit a certain amount of money and lock it up for a set period of time in exchange for a fixed interest rate. The amount of time you lock away your money is called the term. Banks typically offer CDs with terms ranging from six months to a year.

These CDs usually break down in three-month, six-month, one-year, two-year, three-year, four-year, and five-year terms. However, some banks may offer CD terms as short as one month and as long as 10 years or more.

Here’s how investing in a CD works: You first choose a CD with a term and rate that works for you. Then, you leave your deposit with the bank until the end of the term, also known as the point when the CD reaches maturity. Finally, you withdraw your money with compounded interest paid.

However, you generally can’t take your money out of the CD before maturity without triggering an early withdrawal penalty. These fees vary depending on the term and are usually higher for longer periods. For example, the typical early withdrawal penalty on a 12-month CD is about three months’ worth of interest, according to research published by UCLA. It climbs to six months’ worth of interest for two-year CDs.

Still, you can find no-penalty CD options. However, the rates on these may not be as favorable.

But if you don’t withdraw your money when the term ends, some banks renew your CD for the same term with the going rate at the time.

So it’s important to always read the fine print when opening a CD. Here are some more tips.

How to Choose the Right CD

You can start by deciding on the term length you’re comfortable with. Maybe you’re saving for a downpayment on a home or you’re socking away money for a wedding or vacation with a set date. Analyzing why you’re saving should give you a good estimate of what the term on your CD should be.

Next, shop around. Some online banks may pay better yields on CDs because they lack the overhead charged by their brick-and-mortar counterparts. But this doesn’t mean some big banks won’t offer a better deal. So it’s crucial to compare your options. Here’s how average CD rates break down, according to FDIC data.

• three-month: 1.50 percent
• six-month: 1.65 percent
• 12-month: 1.83 percent
• two-year: 1.52 percent
• three-year: 1.33 percent
• four-year: 1.24 percent
• five-year: 1.32 percent

While these may not seem immediately enticing, consider the average savings account rate is 0.42 percent today. And you can find CD rates around 4 percent and 5 percent for longer-term CDs at competitive banks.

But it’s not all about rates. You should also look at minimum deposit requirements. These can range from $500 to $2,500. But you can find CDs with no minimum deposit and jumbo CDs with deposits as high as $100,000 or more.

Moreover, you should take a magnifying glass to any fees the bank may charge, as these could eat away at your investment. Some banks charge maintenance fees, while others don’t.

Moving forward, you should also ensure you’re getting a CD from a bank insured by the Federal Deposit Insurance Corporation (FDIC) or a credit union insured by the National Credit Union Administration (NCUA). This would protect your deposit should the bank fail.

You could also read user reviews on sites like Trustpilot. This can give you an idea of what it’s like to work with the bank if any issues arise.

Should You Open a CD Now?

CD yields tend to drop after the Fed cuts interest rates and vice versa. In retrospect, banks were offering some of their highest yields when the Fed pumped up interest rates 11 times between 2022 and 2023, as the central bank fought record-high inflation in the aftermath of the COVID pandemic.

But as inflation showed signs of cooling, the Fed began cutting rates in September. And even though economic data and geopolitical uncertainty have caused the central bank to forecast cutting rates at a slower pace than previously anticipated, the Fed is still considering two rate cuts in 2025 and a more restrictive policy.

Theoretically, that would mean consumers can expect CD rates to continue falling and then staying steady. Thus, securing a high rate today for a longer-term CD could prove advantageous.

But what if inflation rises higher?

The Fed in December expressed that despite signs of inflation potentially rising 2.5 percent next year, other economic data suggest it may not need to put an unexpectedly tight grip on monetary policy.

“We have been moving policy toward a more neutral setting in order to maintain the strength of the economy and the labor market while enabling further progress on inflation,” Federal Reserve Chair Jerome Powell said during a press conference on Dec.18. “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive.”

But regardless of what happens, those interested in CDs should shop around for the best rates, terms, and benefits that meet their goals.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.