Another Fed rate hike could be coming. Should you open a CD now or wait?
Following months of positive news, the inflation rate ticked up by 3.2% in July, giving economists some pause that the worst is truly over. Higher inflation generally means higher interest rates, and the Federal Reserve has made multiple attempts to tame it, raising the benchmark interest rate to a range of 5.25% to 5.50%, the highest it's been in 22 years. Against this backdrop, borrowing has become exponentially more expensive. But rates on traditional savings vehicles have also rocketed upward.
Rates on high-yield savings accounts, for example, are around 4.50% currently, while rates on CDs are comparable and sometimes slightly higher. With this context and the expectation that the Fed may raise interest rates yet again when they meet in September, many savers are wondering if they should open a CD now. Or, should they wait to secure a potentially higher rate?
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Should you open a CD now or wait?
Here are three reasons why you may want to open a CD today:
CD rates are already high
Rates on CD accounts are already elevated compared to what they had been just a few years ago. So, you can't go wrong by opening a CD today to earn more interest. It's easy to find a CD with 5% APY with no fees online right now. Compared to the minimal 0.43% APY you're likely earning with a regular savings account, you're essentially losing money by not having some or most of your money in a CD.
You don't need to lock it away indefinitely
Traditionally, the higher CD interest rates were tied to long-term CDs. But with the current market uncertainty, higher rates are also accompanying short-term CDs. This makes them particularly attractive for those savers who want to earn interest at a higher rate but don't want to lock their money away for an extended period.
Interest rates may have already peaked
No one knows for sure what the Fed will do next month — nor do they know precisely how that will affect rates on CDs. With this understanding, and the knowledge that continuous rate hikes are unlikely, it may still make sense to act now.
If rates have already peaked or are close to peaking, you may not want to risk waiting. CD rates are locked in for the duration of the CD term, regardless of any rate activity that takes place during that time frame. So, if you can secure a high rate now it may be worth locking it before rates plateau — or eventually fall.
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And here are two reasons you may want to hold off:
Rates could go even higher
"I believe the Fed will raise rates again in September and will continue to do so until there is more realized pain in the economy and the markets," Jim Crider, CFP, founder of Intentional Living FP, recently told CBS News. With inflation still stubborn in the background, and higher rates the traditional way of combatting it, CD rates could theoretically go even higher. This means you would lose out on some interest by opening a CD now.
You need access to the funds
To get the true benefit of a CD, savers will need to leave their money in the account for the full term, Otherwise, they risk getting penalized some or all of the interest they've accrued to date. If you can't afford to lock your money away for the full term, then it may not be worth opening now. In this case, a high-yield savings account, with its elevated rates and flexible terms of use and access, may be the better alternative.
The bottom line
As with most financial considerations, the timing for when to open a CD is a personal one. It's likely worth opening now due to already elevated interest rates, particularly for short-term CDs. And, considering that interest rates may have already peaked on these sort of accounts, now could be the last chance to secure that higher rate.
At the same time, rates could potentially tick up yet again after the Federal Reserve meets in September. And, if you need the funds and can't afford to lock your money away now, you may be better off skipping a CD and putting that money into a high-yield account instead.
