Since the start of the year, CD rates have sat at 5% (or a bit higher), giving savers the opportunity to earn a nice return on their money. But those 5% CDs may not stick around much longer.
The Federal Reserve is scheduled to meet on Sept. 17-18 to discuss its interest rate policies. During that meeting, the central bank is expected to move forward with its first federal funds rate cut of several — something it’s been toying with since the beginning of 2024 due to cooling inflation.
Whether you have money in a CD already or want to open a new one, you may be wondering how the Fed’s actions might affect you. Here’s what you need to know.
Your current CD is safe
CDs require you to commit to leaving your money in the bank for a period of time, whether it’s six months, 12 months, or longer. And if you withdraw your money before your CD comes due, you can get slapped with an expensive penalty.
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But in exchange, CDs offer a couple of benefits. First, they generally tend to pay more interest than savings accounts. But also, they guarantee you a specific interest rate for the duration of the term.
What this means is that if you already have a CD in place, the Fed’s upcoming rate cut decision won’t impact that money. If you opened a 12-month CD that matures on Jan. 14, 2025, at a 5% APY, you’re guaranteed 5% on your money until that date. It doesn’t matter what happens in between.
The days of 5% CDs may be limited
The Fed’s anticipated rate cut won’t impact a CD that’s already in place, but it’s likely to drive CD rates downward. While you might still be able to find a 5% CD today, that opportunity may be dwindling. So if you have money you want to put into a CD, it pays to take action before the Fed’s upcoming meeting.
You should also know that rate cuts aren’t expected to be a one-time thing. Rather, September’s expected rate cut will likely be the first of several. What this means is that while you don’t have to rush to open a CD this month if you’re not ready, the longer you wait, the lower a CD rate you might end up with. However, you also shouldn’t worry about opening a CD later on this year or in early 2025, as opposed to right now.
Let’s say you can’t swing opening a CD today, but you’re expecting a holiday bonus in late December that will open the door to getting one. While you may not get a 5% CD at that point, there’s a good chance you’ll be able to lock one in somewhere in the 4% range. That’s not quite as good as 5%, but it’s still a great rate to snag on a CD, historically speaking.
Of course, there are still a lot of question marks as to how the Fed will approach interest rate cuts. The central bank has two meetings beyond the one slated for mid-September. Technically, there could be up to three rate cuts before the end of 2024.
The extent to which the Fed cuts rates will hinge on a host of economic factors, including how the unemployment rate shifts and how inflation trends during the tail end of the year. It’s a good idea to keep tabs on the Fed’s decisions either way, as they could impact your finances.
A silver lining for lower CD rates
Even if you’re not interested in opening a CD, rate cuts could lead to lower borrowing costs. So while late 2024 or early 2025 may not be as optimal a time to open a CD as right now, on the flipside, you may find it a lot less expensive to sign a loan later this year or early next.
