A lot of people are loving today’s CD rates. And who wouldn’t? If you have the cash on hand, why not put it in the bank for a year, sit back, and earn 5% on your money without taking on the sort of risk you would in a stock portfolio?
But as much as I hate to be the bearer of bad news for CD fans, I can’t keep you in the dark: The days of 5% CDs are most likely numbered.
I predict that September 2024 will be the last month to lock in a 5% for a long time. So if you want that specific rate, I suggest opening a CD within the next few days.
A move you shouldn’t delay if you can help it
CD rates are so outstanding right now because the Federal Reserve raised the federal funds rates multiple times in 2022 and 2023 — it had to.
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The Fed’s job is to oversee monetary policy and maintain a stable economy to the best of its ability. When inflation starts to heat up, the best tool the Fed has at its disposal for taming it is to raise its benchmark rate — the rate at which banks borrow money from each other. And banks and lenders follow suit by raising the interest rates they offer consumers.
This achieves a dual purpose. First, it discourages people from borrowing money because loans and credit card rates become more expensive. That helps ease consumer demand so supply can catch up, which is what’s needed for inflation to cool.
Second, higher interest rates encourage consumers to keep their money in the bank, whether in a CD or a savings account. The idea of earning 2% on a 12-month CD isn’t that exciting, right? But getting 5% on a CD is a different story. And if consumers are motivated to hang onto more of their cash, they won’t be spending it.
Now that inflation has cooled, the Fed is looking to start lowering rates. And there’s a lot of pressure to do that, because the cost of borrowing has soared over the past couple of years to the point where mortgages, auto financing, and other loans just aren’t affordable. Once that happens, CDs are apt to start paying less.
The Fed’s next opportunity to cut the federal funds rate is at its Sept. 17-18 meeting. If you’re still seeing CDs available at 5%, I’d recommend locking one in before that event.
Don’t let falling CD rates stress you out
Even though I think September will be the last opportunity to lock in a 5% CD for a while, I also don’t want that to be a source of stress for anyone. Indeed, just as CD rates didn’t go from 2% to 5% overnight, they probably won’t plunge from 5% to 2% either.
The Fed is expected to cut its benchmark rate gradually over time. While you may not be able to lock in a 5% CD next month, a 4.5% rate might still be available. And you may find that you’re able to get a 4% CD through early 2025.
If you’re not ready to open a CD right now, don’t do it. Rushing into a CD could sorely backfire.
If you end up needing your money before your CD’s maturity date, you’ll risk a costly early withdrawal penalty that negates the benefit of locking in a 5% rate in the first place.
Instead, take a calm look at your financial situation. If you have extra cash on hand and a CD fits into your savings plans and goals, then I recommend opening one before the Fed’s next meeting. If that’s not the case, stick to whatever other plan you had.
Opening a 5% CD is by no means your only opportunity to earn a nice return on your money. There are loads of other options, including investing in stocks and other assets whose returns might far surpass today’s CD rates.
And remember, if you end up with a 4% CD a few months down the line, that’s still a fantastic rate, historically speaking. So if opening a CD this month isn’t in the cards, know that your finances are by no means doomed.
