CD Interest Rate Prediction: Interest rates are trending downward.

Knowing what interest rates will affect you in the future can help you determine the best CD investment strategy now. Here’s what to expect in the coming months:

What causes CD interest rates to rise or fall?

CD interest rates are generally affected by changes in the federal funds rate, also known as the Federal Reserve’s benchmark interest rate. The federal funds rate is the interest rate that commercial banks charge each other to borrow money overnight (also known as reserve requirements) because banks are required to maintain cash reserves equal to a certain percentage of their deposits at all times.

The Federal Open Market Committee (FMOC), comprised of 12 Federal Reserve members, meets eight times a year to review economic conditions and make monetary policy decisions. Those decisions can often involve raising interest rates in response to rising inflation. When the Federal Reserve lowers its target interest rate, banks also lower interest rates, including CD rates, accordingly.

If the Federal Reserve’s target interest rate rises, the cost of borrowing from other banks also increases. Banks may raise lending rates to cover higher costs and remain profitable. To fund these loans, they often need to attract more customers and increase their deposit base, which they do by raising the interest rates they offer on deposits such as savings accounts and CDs.

As the economy grows and demand for credit increases, CD interest rates may increase. An increase in credit applications often leads to interest rates rising across the board as banks compete for deposits to fund their lending activities.

Conversely, when the Federal Reserve lowers its target interest rate, as it has recently, banks often lower interest rates on deposits, including CDs, to reflect lower borrowing costs and lower demand for deposits.

According to Gregory Garcia, senior vice president and chief operating officer of First Commerce, CDs are an ideal deposit product for banks to manage cash reserves because they have a fixed maturity date and are not liquidated as easily as checking or money market accounts. bank. “Securing deposits helps banks manage their cash flow expectations and they are willing to pay higher interest rates to reduce cash flow uncertainty,” he says.

When Federal Reserve rates are high, banks raise CD rates to offset competition from higher rates paid by money market mutual funds and the U.S. Treasury, said economist and speaker Anthony Chan. He added that the rise in CD rates has been exacerbated by concerns that some banks are less safe in this high-interest rate environment due to undiversified loan portfolios and high rates of uninsured deposits or depositors seeking to withdraw their money. “Banks had to raise interest rates to avoid deposits evaporating,” says Chan.

However, CD interest rates may also go down. For example, after the Federal Reserve’s recent interest rate cut, banks may lower their CD rates due to lower borrowing costs. This shift may be fueled by declining demand for loans and a slowing economic environment, which will reduce the need for banks to offer high returns on CDs.

CD interest rates from 2010 to 2024

Historically, CD rates have remained relatively flat over the past decade. The Federal Reserve’s interest rate cuts following the Great Recession pushed interest rates to historic lows.

As of the end of 2010, the 12-month average CD interest rate was 0.53%. It fell to 0.23% in 2012 and remained at that level until 2017.

When the pandemic hit in early 2020, interest rates fell to rock bottom. By the end of 2020, the average 12-month CD interest rate was 0.16%. This trend changed in mid-2022 when the Federal Reserve began raising interest rates to combat rising inflation.

According to the Federal Deposit Insurance Corporation (FDIC), the current average 12-month CD interest rate is 1.85%. However, many banks are now offering interest rates of 4% to 5% or higher, especially for terms of less than two years. Some organizations that regularly offer excellent CD rates include:

Will CD interest rates continue to rise?

After raising interest rates 11 times to stem inflation, the Federal Reserve has now pivoted to its latest rate cut, lowering the federal funds rate to its target range of % to %.

With initial rate cuts already in place, CD rates are expected to gradually decline. Some top CD rates still hover between % and % APY, but these rates are likely to decline as banks adjust to the new, lower federal funds rate. Although still relatively high compared to previous years, these rates may not remain at these levels for long.

How to Make the Most of Today’s CD Prices

Even if CD rates increase or decrease, you can maximize your savings by using today’s rates.

• Decide whether a short-term or long-term CD is best for you. Garcia points out that we have experienced a long-term inverted yield curve environment. This means that short-term interest rates are higher than long-term interest rates. Therefore, short-term CDs (e.g., two years or less) are best. Plus, it’s impossible to predict what CD interest rates will do over the next few years, so it’s best to avoid tying up your money for too long. Sticking to a six- to 18-month term allows you to take advantage of today’s high interest rates, but allows you to move your funds elsewhere (without paying early withdrawal penalties) when rates drop. But Frank Newman, Ally’s director of portfolio construction and due diligence, warns investors about the reinvestment risks that arise when interest rates fall after a CD matures. You may eventually need to reinvest your money at a lower interest rate, so tying up your money for the long term can increase your returns over the years, regardless of the interest rate.
• Creating a CD Ladder: Alternatively, you can take advantage of longer-term CD rates while maintaining liquidity in the short-term by putting money into a CD ladder. “A prudent CD investor may want to spread his investments across multiple terms to ensure that market timing does not have a significant impact on the price adjustment of the investment at maturity,” says Garcia.
• Hedge your savings. Deposit interest rates have risen across the board. So, depending on your financial goals and cash flow requirements, you may want to place some cash in a high-yield savings account or similar low-risk investments, such as T-bills, to have a base just in case. CD rates vary dramatically.

Your current bank may not offer the best CD rates, but there are banks and credit unions that offer excellent rates on CDs and sovereigns, regardless of where you live. Here are some examples from around the country:

Highest CD rates by period

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If you’re looking for a place to keep your savings safe and get competitive interest rates so your money can grow faster, it’s hard to beat CDs. Interest rates are at their highest in about a decade and are likely to continue rising through 2024.

Although it is clear that interest rates have started to decline following the recent Federal Reserve rate cuts, the future direction of CD rates remains uncertain. Choosing a shorter CD term of one year or less gives you more flexibility, allowing you to adjust your strategy if interest rates continue to fall. Or, you can lock in a higher interest rate before rates fall further by choosing a longer-term CD. Alternatively, using a CD ladder can help you lock in the best interest rate currently available while maintaining liquidity as your CDs mature at various intervals.

Also, remember that to enjoy the full benefits of a CD, you must maintain the deposit until maturity. If you withdraw your funds early, you may be subject to an early withdrawal penalty, which could eliminate your interest income. So if you think you need access to cash early, it might be wise to skip CDs and choose a high-yield savings account instead.