Interest rates may have peaked. Here's why you should open a CD now.
The Federal Reserve raised interest rates yet again earlier this month, their tenth such hike dating back to March 2022. The benchmark rate is now between 5.00% and 5.25%, making borrowing more costly for many Americans. That said, the hike could be the last one for a while as the Fed monitors its intended effect on inflation.
In announcing the hike on May 3, the Federal Open Markets Committee implied further increases might be off the table. They cut a nod to "future increases" that had been in previous statements and simply noted that "tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation."
While the rate hikes have hurt prospective homebuyers and those looking to refinance their existing homes, the news hasn't been all bad. For example, it's significantly improved the appeal of deposit vehicles like high-yield savings and certificate of deposit (CD) accounts. Both now have exponentially higher interest rates than just a few years ago.
That said, with rates possibly having peaked, savers should prepare accordingly. This is a particularly beneficial time to open a CD.
Start by exploring your CD options here to see how much more interest you could be earning.
Why you should open a CD now
While it can be advantageous to open a high-yield savings or CD account in today's high-rate environment, only one will be the better choice should rates stay steady or taper off. In this case, CDs are the preferred option. Here's what to know:
CD interest rates are locked
Unlike the annual percentage yield (APY) on a high-yield savings account, CD interest rates are locked. This means you'll earn interest at the rate you opened the CD with for the entire term you have it - regardless of what's happening in the larger economy.
Let's say you open a six-month CD at a 4% interest rate this month. The Fed could keep rates steady in June and July and maybe even drop them in August and September. But because you're locked in at that 4% rate, you'll still earn interest on your deposit.
Just understand that the money in your CD will generally be inaccessible until the term has expired (or unless you've opened a no-penalty CD). That said, if you're comfortable locking away a set portion of your money, it makes sense to open a CD now while rates are high and the long-term forecast for future rate hikes is uneven.
You're (probably) losing money
Simply put: If you don't have a portion of your funds in a high-yield savings or CD account, you're losing money. It's really that basic.
Just look at the average interest rate regular savings accounts offer. According to the FDIC, it currently stands at 0.40%. Rates on CDs, however, are in the 3.5% to 5% range. That's a lot more money to make simply by transferring funds.
How much more money? Let's consider a $5,000 deposit for reference. Deposit that into a regular savings account, and you'd have $5,020 after a full year. But put it into a 12-month CD at a 3.5% rate, and you'd grow your bottom line to $5,175. And that's at the 3.5% rate! Chances are good that you can find an account with higher rates with little to no penalties and fees that otherwise would eat into your earnings.
So start shopping for a CD account now and earn more interest before the Fed makes another move.
The bottom line
When it comes to personal financial decisions, timing is everything. For those who want to earn more interest on their savings, the timing couldn't be better to open a CD. Taking the Fed's recent activity - and the possibility that future rate hikes may be off the table - into consideration, it makes sense to open a CD while you can still lock in a high rate, regardless of where the economy heads in the coming months.
