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Why You Shouldn't Rush to Invest in CDs Now

Have you been thinking about opening a CD in 2024? The best CDs are paying 5.00% APY or higher today. That’s pretty good! But the best savings accounts are paying the same or better APYs.

One of the best reasons to open a CD instead of a savings account is to lock in a high APY for a longer period of time, especially if you think interest rates might go down. CD interest rates are fixed for the length of the CD’s term. But savings account rates can go up or down with interest rate changes.

But based on the latest economic trends and statements from the Federal Reserve, you probably shouldn’t be in a big rush to invest in CDs instead of savings accounts. Let’s look at a few reasons why the urgency to open a CD might have subsided — for now.

Interest rates might stay “higher for longer”

Just a few months ago, in December 2023, the general consensus among Wall Street experts was that the Fed was going to cut interest rates in 2024. After hiking the federal funds rate rapidly in 2022-2023 to try to bring down inflation, lots of investors and financial journalists believed that the Fed was likely going to reduce interest rates in 2024.

The chance of looming interest rate cuts made millions of Americans eager to move money to CDs, so they could lock in higher yields. During 2023, according to research cited by Bloomberg, investors moved more than $600 billion of cash into “large CDs” (defined as having balances of $100,000 or more).

But in the past few months, new economic data has been disappointing to people (and investors) who were hoping for rate cuts. The economy has not slowed down enough for the Fed to feel a strong need to cut interest rates, and there are still signs of higher inflation.

As a result, much to many experts’ surprise, the Fed keeps not cutting interest rates in 2024. And the latest statements from Fed Chair Jerome Powell (and other analysis) seem to suggest that, although the Fed is probably not going to raise interest rates anytime soon, they might leave the current rates “higher for longer.”

Interest rates staying high = no rush to open a CD

If the Fed keeps its effective federal funds rate at the current level of 5.25%-5.50%, that means the best CDs, savings accounts, and money market accounts will likely keep offering APYs at 5.00% or more.

Opening a CD is a good way to earn a guaranteed rate of interest on your savings for a fixed period of time (“term”). But if interest rates stay the same for a while, or even go higher, you won’t necessarily earn more interest with the best CDs than you’d get from the best savings accounts. In fact, the best savings accounts are actually paying just slightly higher interest now (5.26% APY) than some of the best CDs (5.25% APY for a 1-year CD).

Bottom line

No one knows what the Fed will do next. The economy rarely moves in a perfectly predictable way, and inflation data can be surprising even to experts. Unless you’re a professional bond trader who makes big investment decisions based on fluctuations in interest rates, the Fed’s next move shouldn’t determine your choice of a CD vs. savings account.

But if interest rates stay the same for the foreseeable future, CDs are not going to be a better deal than the best savings accounts or money market accounts. Don’t feel as if you have to commit to a CD to earn high yields. You have other choices — money market accounts and high-yield savings accounts can give you a similarly high APY as the best CDs. And you won’t have to lock up your money or worry about early withdrawal penalties.

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