Have long-term CD rates peaked? Here's what the experts say
High interest rates aren't ideal if you have variable-interest debt or want to take out a loan, but they can be beneficial for investors. For example, the average rate on a 30-year fixed-rate mortgage increased from 2.97% to 6.79% over the last three years. Meanwhile, the average interest yield on a 60-month certificate of deposit (CD) increased from 0.28% to 1.38%, but if you shop around online you can find a CD with a rate many times higher right now.
The current high-interest environment largely stems from the COVID-19 pandemic. Following the outbreak, the Fed dropped the fed funds rate to zero. Inflation then began to run away in 2021 due to a variety of factors such as supply chain issues, a tight labor market and pandemic relief government spending. To reel it in, the Fed hiked the fed funds rate 11 times over a year and a half, resulting in a cumulative 5% increase between March 2022 and July 2023.
This has caused CD returns to surge, both for short-term and long-term CDs. But that trend could be changing soon.
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Have long-term CD rates peaked? Here's what the experts say
While interest and inflation rates have now stabilized, both are higher than they were in the years leading up to the pandemic. As a result, CD rates have remained elevated across the board. However, an unusual inverted trend has emerged.
While you typically earn more by leaving money in a CD for a longer term, banks are currently offering higher rates on shorter-term CDs. For example, Marcus Goldman Sachs is currently offering a 5% APY on a 14-month CD but only 4% APY on a five-year one.
So is it still a good time to invest in long-term CDs? While longer-term CDs currently have lower rates than some shorter-term alternatives, they can still be a good option, according to the experts we spoke to.
"The (long-term CD) rates in today's economic environment are still at a higher rate than we've seen in previous years," saysSarah Wicker, manager of deposit account and IRA services at Georgia's Own Credit Union.
But they are unlikely to stay high much longer and several experts agree that rates are on their way down.
"Rates are likely going down for the rest of 2024, so locking in higher yields early could make sense," says Gabe Krajicek, the chief executive officer at financial services company Kasasa.
Rob Williams, the managing director of financial planning at Charles Schwab says market rates for new brokered CDs with terms longer than a year have already fallen modestly, in part due to the expectation of rate cuts later this year.
Further, Wicker has seen the rates trending down. "While nothing is guaranteed, the current economic environment seems to be leveling out, making long-term CDs more attractive as other rates are starting to come back down," she says.
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Is a long-term CD right for you?
Long-term CDs can be a good option right now but whether one is right for you will depend on your situation and risk tolerance.
"You'll want to compare rates, as well as look at your whole financial picture to determine how long you can lock your funds into a CD without needing to access those funds," says Wicker.
Further, Krajicek recommends considering the pros and cons of different investment options. "It is a consumer's risk tolerance more than the rate that makes CDs a good deal vs. stocks. Over the long haul, stocks historically beat CD returns. But CDs are FDIC/NCUA insured and the returns are guaranteed," he said.
