Do long-term CDs make sense in today's rate environment? What experts say

Inflation soared during the pandemic, and the Fed's efforts to tame it drove up interest rates over 2022 and 2023. While the annual inflation rate in 2020 was a mere 1.23%, it peaked at 8% in 2022 before settling at 3.4% for the 12 months ending in December 2023. Similarly, the Fed's aggressive cycle of rate hikes pushed the effective federal funds rate from 1.55% to 5.33% during the same span, according to Macrotrends.

While higher interest rates have burdened borrowers, they've been a boon for savers looking to maximize their returns. Many savers moved money from their traditional savings accounts to deposit accounts offering significantly higher returns, such as high-yield savings accounts and money market accounts. Certificates of deposit (CDs) also offer high yields in exchange for keeping your funds locked in the account for a specific period, usually ranging from three months to five years. 

Historically, longer-term CDs offer higher rates to account holders to entice them to lock in their funds for a longer period. However, that's not the case right now because banks are increasingly concerned that interest rates could drop during a CD's term. "Banks expect rates to come down in 2024, so to balance their exposure, they don't want high fixed yields for longer durations because as rates come down, they'll lend out at lower rates," says Matt Willer, a managing director of capital markets and partner at Phoenix Capital Group Holdings. "It's all a portfolio balancing act."

So does it make sense to park your money in a long-term CD amid this unique yield situation? 

Find out the best CD rates you could earn here. 

Do long-term CDs make sense in today's rate environment? What experts say

We asked the financial experts whether it makes sense to open a long-term CD in this rate environment. Here's what they shared.

CDs offer higher rates

Regardless of the term length, CDs are still a good savings option due to their higher yields.

"CDs typically offer higher interest rates than savings accounts and earn interest on the CD balance for a fixed period of time," says Steve Goodman, the managing director and head of product at JPMorgan Chase & Co.

There's no "perfect time" to open a CD, and attempting to time the CD market is often a fool's errand. Instead, focus on your financial goals, assess when you might need the money and compare interest rates from different financial institutions. It's more about finding a CD that lines up with your savings timeline and provides a return that meets your goals.

Explore today's top CD account options online here.

CDs are a smart option to save for future events

Putting your cash in a long-term CD could make sense if you're saving for a particular goal. In that case, you can align the CD's maturity date with your target date for when you need the money. For example, if you want to buy a house in a few years, you might employ a CD ladder strategy and open CDs with different maturity dates to coincide with the timing of your home down payment.

Getting a long-term CD now might also make sense if you already have the funds you need for a life event but won't need to use them for a while. 

"[CDs] can also be useful for planning expenditures for a life event," says Robert J. Mascia, the CEO and founder at Green Ridge Wealth Planning. "Meaning, I want to do this in x amount of time. I then take the money I want to allocate toward that expense, lock it into an x-duration CD, and voila. I have a protected instrument that is tracking a higher rate of return than the long-term inflation rate."

Consider CD ladders and other options

According to Willer, long-term CDs may not be your best option if your goal is to earn the highest yield. 

"I don't think I'd lock in the long-term rates as it's not materially higher than real inflation. I'd look at higher-yield, long-dated corporate bonds. You get the yield, and as rates fall, you get the benefit of being locked in at a higher rate, with the principal appreciation bonds will deliver as rates fall," Willer says.

Willer notes a CD ladder with both short- and long-term CDs could benefit savers. 

"It gives you a higher blended rate since shorter terms have higher yields, and it provides you with liquidity so you have access to your capital in staggered windows to redeploy based on market conditions in that timeframe. I'd like the shorter terms currently."

The bottom line

Long-term CD rates are currently lower than those for short-term CDs because the financial markets appear uncertain for the future. The uncertainty could arguably be the best reason to seek out the predictable returns and security of a CD. Now may be a good time to lock in historically strong CD returns, up to the federal deposit insurance limits. Just be sure to deposit only as much as you can afford to leave for the duration of the CD term to avoid the risk of an early withdrawal penalty.