Should I Lock in CD Rates now?

Current Interest Rate Trends for CDs

Let's first talk about the relationship between the federal funds rate and interest rates on CDs and savings accounts.

What Is the Federal Funds Rate?

The federal funds rate, which is set by the Federal Reserve, reflects the rate that banks pay to borrow money from each other. It also serves as a benchmark rate that financial institutions use to determine the rates they offer to consumers. That includes the interest they charge on loans and credit cards—and the annual percentage yields (APYs) they pay on savings accounts and CDs. When the Fed bumps its rate up or down, CD rates tend to move in the same direction.

How Does the Federal Funds Rate Affect CD Rates?

The federal funds rate dropped to almost zero during the COVID-19 pandemic. In April 2021, for example, the rate dipped to 0.07%. The average 12-month CD rate at that time was offering APYs of just 0.15%. Since then, the Fed has hiked its rate 11 times in an attempt to bring inflation under control. So will CD rates go up if the Fed raises rates? Since August 2023, the Fed rate has been hanging tough at 5.33%—and some CDs are currently offering APYs as high as 5.25%.

Are Rates Going to Drop Soon?

There's speculation that rates could start declining in the near future, especially as inflation appears to stabilize. Federal Reserve Chair Jerome Powell said in a July 2024 press conference that "a rate cut could be on the table at the September meeting," which is right around the corner. If the federal funds rate does decline, CD rates will likely do the same.

When to Lock in Current CD Rates

You may wonder if it's worth putting money in a CD right now. The answer depends on interest rates and your financial situation and goals. If any of the following scenarios apply, it might be a good time to open a CD.

You Have a Specific Financial Goal in Mind

When you put money into a CD, you're usually required to leave it there until the term ends. Early withdrawals often trigger a fee, which can significantly deplete your returns. If you have a clear timeline and a specific goal in mind, you could open a CD and lock in today's competitive rates. That might make sense if you're saving for something like:

• A down payment on a home or car
• Your next vacation
• Upcoming home improvement projects

You Don't Have High-Interest Debt

You don't have to be entirely debt-free to invest in CDs, but if you have high-interest debt, it might make more financial sense to prioritize it. Putting extra income toward those balances can help you get out of debt faster and pay less interest in the long run. Those savings will likely outpace the returns you'd get with a CD.

Your Emergency Fund Is Looking Good

Financial surprises happen—and they can derail your budget if you aren't prepared. That's precisely why having an emergency fund is so important. The rule of thumb is to set aside three to six months' worth of expenses. Having that cash on hand can help you cover financial setbacks without accruing new debt.

A great place to keep your emergency fund is in a high-yield savings account, which allows you better access to your money while earning interest. Since most CDs have early withdrawal penalties, it isn't the greatest place to keep your emergency fund.

Learn more >> How to Invest in CDs

What to Know Before Opening a CD

• They're considered safe investments. Returns are guaranteed by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor, institution and account category. Credit unions offer similar coverage.
• Long-term returns may not keep up with high-risk investments. The stock market, for example, has had an average annual return of about 10% for the past century.
• There may be a minimum opening deposit. Some CDs require $500 to upwards of $2,500 to open an account.
• CDs can help diversify your portfolio. Holding a variety of different assets, including CDs, can help mitigate investment risk.
• Interest rates are usually higher than savings account rates. You can expect your money to work harder in a CD than it would in a traditional savings account—many of which earn less than 1% interest. That said, high-yield savings account rates are fairly competitive with CDs and are more liquid.
• Early withdrawal penalties apply. Again, most CDs charge a fee for tapping your funds early. That may be equivalent to 60 to 540 days' worth of interest.

Learn more >> The Pros and Cons of CDs

How to Get a CD

Consider the following steps if you decide that now is the right time to open a CD:

1. Understand the different types of CDs and choose the one that best fits your needs.
2. Decide how much money you can afford to put into a CD.
3. Clarify your timeline—how long are you comfortable giving up access to your money?
4. Shop around and compare APYs, minimum opening deposits, early withdrawal penalties and whether the CD is callable. (With a callable CD, the issuer has the right to cancel the term early.)
5. Choose your CD provider and make your opening deposit.
6. Consider a CD ladder, which involves opening multiple CDs with different terms. This allows you to earn interest and free up money as each one expires.

The Bottom Line

With rumors of fed rate cuts, you may ask yourself: Should I lock in CD rates now? If you have a specific financial goal and a stable emergency fund, it might be a great time to cash in on today's competitive interest rates—especially since rates could start declining soon. Whether it's right for you will depend on your financial situation and money goals. If you're looking for easier access to your funds, a high-yield savings account may be a good alternative.