Well, folks, this might be the end of high interest rates.
At its last meeting of 2023, the Federal Reserve seemed confident it would cut rates in the coming year. In fact, 17 of 19 policymakers predicted it would cut rates at least once in 2024, with most forecasting a cut of 75 basis points. As incredulous as it seemed last year, it appears the central bank might be orchestrating a soft landing after all.
Unfortunately, for those who have stashed savings in high yielding accounts, rate cuts will eventually be reflected in our APYs. If the Fed continues this optimism, banks, credit unions, and other financial institutions will likely start cutting today's high savings rates, perhaps even in advance of those implemented by the central bank.
What that means for you is simply this: If you're a saver, now might be the best time to lock into today's rates with a certificate of deposit (CD) before the coming year. Here's why.
1. Rates are still high
While APYs on many short-term CDs have creeped back since September, they're still higher than they've been in over a generation.
It's still pretty common to see banks and credit unions offering 5% or higher on CDs with terms 18 months or less. In fact, there are currently dozens of CDs on the financial platform Raisin that are paying above 5%, with some even paying as high as 5.50%. You might even be able to find APYs above 5.50%, although, again, these promotions are becoming fewer.
As we enter 2024, we'll likely start to notice high APYs on shorter and shorter terms -- like three to six months -- while longer terms start to scale back. This would reflect the expectation that the Federal Reserve will slowly cut rates over the next year. That doesn't mean you won't see great APYs on long-term CDs. What it does mean, however, is that if you do see a great APY in the long term, don't hesitate to lock some money into it. These will become rare, so it might be worthwhile to snag a CD with 18 months or more of high interest before they're gone. Long terms you should monitor include:
- 18-month CDs
- 2-year CDs
- 3-year CDs
- 4-year CDs
- 5-year CDs
2. No-penalty CD rates are also high
For many people, the problem with CDs is that you can't withdraw money before maturity without paying a penalty. That makes CDs risky for people with smaller savings who might opt for something with more flexibility, like a money market account.
No-penalty CDs, however, offer a middle road between no-penalty withdrawals and high interest on your savings. Their APYs are typically smaller than regular CDs. But in our current high interest rate environment, it's not uncommon to find no-penalty CDs on par with those that impose a penalty.
If you have savings that you might use in the near term, a no-penalty could help you lock into a great savings rate without risking a penalty. For instance, many of Raisin's no-penalty CD offerings have terms ranging from three to 12 months and APYs above 5%. In fact, some of these CDs have higher APYs than comparable penalty-imposing CDs, a rarity you likely won't find when interest rates drop.
3. Others savings products won't freeze interest rates
The benefit of a CD is that you can lock today's high rates for the length of your term. If your term is 12 months, your APY would last that long, no matter how many cuts the Federal Reserve implemented next year.
Other savings products, like high-yield savings accounts and money markets, don't freeze rates. Instead, you'll have a variable rate that will fluctuate depending on the Fed's policy. Many of these accounts currently have rates on par with CDs, but they can't offer you guaranteed returns on your savings. Moving money from these savings accounts into CDs would help you earn high interest for a longer period, so long as you don't need that money in the near term.
Put some cash in a top-paying CD
The fact is, high CD rates might not be here much longer. If you have savings, now might be the best time to lock into these high rates before they're gone. Check out some top-paying CD providers and don't hesitate to freeze a great rate before it's too late.
