(NewsNation) — With the Federal Reserve signaling multiple rate cuts in 2024, yields on certificates of deposit (CDs) may also go down, which means now could be a good time to lock in higher rates.
A CD is a type of savings account offered by a bank that earns interest on a lump sum of money over a fixed period. You surrender your money for a set amount of time, and in exchange, the bank typically offers a more favorable rate than other savings accounts. That rate doesn’t change for the entire term of the CD even if market conditions do.
For example, a $5,000 deposit on a 6-month certificate at 5% interest would earn $123. A CD with those same terms on a $10,000 deposit would earn $247 after six months.
CD rates have gone up with the Fed’s rate hikes in recent years and are now the highest they’ve been since 2007. Today’s top CDs pay as much as 5.60% for a one-year certificate, according to Bankrate.com. The best 6-month CDs currently top out at 5.75%, per WalletHub.
Nobody knows for sure if, or when, CD rates will go down, but here’s what experts are saying:
- “These rates may be as good as we’ll see for a while,” Christine Benz, director of personal finance and retirement planning at the research firm Morningstar, recently told the New York Times.
- “A faster decline of CD rates will likely take place once the Fed rate cuts begin,” Ken Tumin, a senior industry analyst at LendingTree and founder of DepositAccounts.com, told Yahoo Finance. “So locking in CD rates now makes sense before rates fall more.”
Like other bank accounts, CDs are automatically insured if the financial institution you’re dealing with is a member of a federal deposit insurance agency like the FDIC. That means if a bank or credit union fails, you’re guaranteed to get your money back up to $250,000.
But CDs aren’t for everyone, especially those who aren’t comfortable locking up their money for some time. You’ll typically pay a penalty if you have to pull your cash before the CD matures.
And although they’re lower risk than investing in stocks, CDs also have lower returns over the long run.
“CDs are short-term vehicles, which could be appropriate for an emergency fund or to save up for a purchase in the near future. It likely is not the option for long-term retirement accounts — investing is,” Kelly LaVigne, vice president of Consumer Insights at Allianz Life, told Yahoo Finance.