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The US economy is stabilizing after years of turmoil. Inflation has cooled from its peak of 9.1% in 2022 to 2.5% in August 2024, although it is still above the Federal Reserve’s 2% target. Interest rates remain high, with the federal funds rate frozen between 5.25% and 5.50%.
These high rates have been a boon to rescuers, especially those who use them certificates of deposit (CD). Many banks offer CD rates up to 4% to 5%, a significant jump from the average of 0.19% in May 2021. But as the Fed considers potential rate cuts, the rescuers need new strategies.
We consulted three financial experts to get their best tips for getting the most out of CDs in the coming months. They shed light on smart CD moves, explain why CDs are still worth it and discuss the advantages of opening one now — even with the possible rate drops ahead.
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How to make CDs valuable as interest rates fall
Even with the Fed set to start cutting rates, CDs can still be a powerful tool in your savings arsenal. The key is to know how to use it well in a changing market.
John F. Pace, certified public accountant at Pace & Associates, CPAs, puts today’s rates into perspective: “In the 1980s, we saw CD rates climb over 10% at times, allowing clients to maximize returns in a high-rate environment.” He explains that while the rates are much lower than today, they are still favorable compared to recent history.
Expert strategies for CD investments
To help you make smart CD moves, we’ve gathered advice from two financial professionals—Pace of Pace & Associates, CPA, and Henry Yoshida, certified financial planner and co-founder of Rocket Dollar.
Here are his tips for getting the most out of your CD investments in the current environment:
- Match the terms of the CD to your goals: Yoshida advises, “First, align (your) timeframe for the money earmarked for CDs/savings before embarking on CD purchases.” If you’re saving for a home or a down payment in two to four years, Long term CD it could work better. These tend to have less sensitivity to short-term interest rate cuts.
- Consider short-term CDs for flexibility: “Focus on short-term CDs, about six to 12 months, (if you want to) take advantage of existing CD rates before a potential drop,” Pace suggests. These often offer competitive rates and let them reassess your options first.
- Try CD laddering: Yoshida recommends “scaling from six months to five years to maintain your slight advantage over prevailing rates.” This means spread your money across CDs with different maturity dates.
- Compare CDs with high-yield savings accounts: For short periods of six to 15 months, CDs are often subject to higher rates than high yield savings accountsaccording to Yoshida.
- Take advantage of promotional rates: Pace shares an example of a customer who “opened a 9-month CD at 2.5% to take advantage of a promotional rate.” Keep an eye out for these special offers.
- Revaluation at maturity: When your Mature CDreview current rates. If rates have changed, you can reinvest in another CD or explore other options.
Start with a CD while interest rates are still high.
Why CDs remain attractive in a declining rate environment
“CDs right now are still a good investment option, even if the Federal Reserve cuts interest rates. If you go back to the 2021 CD interest rates, they weren’t even half a percent” , says Kriststin Petersmarck, representative of the investment board. at New Horizon Retirement Solutions. This highlights how far CD rates they came, and why they are still worth considering.
Pace advises not to wait, saying: “Although the rates may decrease in the coming months, (you) should not hesitate to lock in the existing rates, especially through short-term CDs.” Note that even a small fee difference can add up thousands of dollars over time.
Yoshida shares another reason for acting now. “CD rates generally lag the current interest rate at any given time, so there is an opportunity to (secure) some arbitrage between current interest rates and lagged CD rates,” he says. In simple terms, you may be able to get a better deal on a CD now than on other savings options.
The background
“The best strategy is to invest in a CD now instead of waiting,” advises Petersmarck. But remember, unlike high-yield savings accounts, CDs lock in your money for a set amount of time. You can be subject to withdrawal penalty if you need to access the funds before the end of the term.
To find the right fit, think about when you need your money and how much risk you are comfortable with. Compare CD rates from different banks and lenders and don’t hesitate to ask a financial advisor for help. They can walk you through your options, explain them CD terms and help you decide if CDs make sense for your financial goals.