Is now the best time to lock in a long-term CD?
Over the last few months, all eyes have been on the Federal Reserve in hopes that a rate cut will occur, alleviating some of the high costs of borrowing that Americans are facing in today's elevated rate environment. But while inflation is cooling, at a rate of 3.3%, the inflation rate still hasn't reached the 2% rate targeted by the Fed — so the Fed has kept rates paused at a 23-year high over the last several months. That said, many experts forecast that at least one rate cut could occur in the coming months, making it more affordable to borrow money for a home, a car or any other purpose.
But the downside to the potential rate cuts is that when the Fed drops interest rates, the interest rates being offered on deposit accounts, like high-yield savings accounts and certificates of deposit (CDs), also decline in tandem. And, lower rates on deposit accounts mean less earning potential for savers. So if you want to take advantage of today's high APYs and be protected against the Fed's potential rate cuts, now might be the time to lock in a rate on a CD account.
There are lots of CD terms to choose from, though, so does it make sense to lock in a rate on a long-term CD in particular right now?
Compare today's top rates on both short- and long-term CD accounts here.
Is now the best time to lock in a long-term CD? Experts weigh in
While it depends on your goals, financial needs and other factors, this could be the right time to lock in a long-term CD rate, experts say. Many short-term CDs currently offer higher interest rates than long-term CDs, but longer-term CDs could pay more in the long run — especially if rates drop soon.
After all, a long-term CD would lock in the rate for a longer period of time, so if rates were to decline, you'd continue earning at that same high rate until your CD account hit maturity.
That's part of why locking in today's high long-term CD rates is a smart move now, Armine Alajian, CPA, a tax consultant and founder of the Alajian Group, says.
"It's a good time to open a CD right now rather than waiting," Alajian says. "The Fed has been steadily raising interest rates over the last couple of years, but that might change during the latter half of 2024."
By getting a good rate on a long-term CD right now, your rate stays the same for the duration of your CD term. So, chances are the rate you get now would be a vast improvement over the rates that would be offered after the Fed's expected rate cut later this year.
But waiting to see what could happen with the overall rate environment could be a riskier bet. After all, there's a chance that if you wait, you'll open a long-term CD at a time when rates are lower than they are today, lessening your earning potential.
"With a CD, your money is locked into the account for a fixed term, and your interest rate is locked in as well," Alajian says. "That could be a better bet for those hoping to cash in on our current high interest rates."
And, the types of interest rates being offered on long-term CDs right now are unusual — and are higher than we've seen in decades. In turn, lower-risk investments like CDs might be worth considering, even though they come with their downsides — like early withdrawal penalties that can eat into your earnings if you need to access your money before the CD's maturity date.
Find out how the right long-term CD could help you meet your money goals.
The bottom line
The prospect of locking in a long-term CD rate in today's high-rate environment is appealing. However, it's crucial to consider your personal financial situation and goals before making a decision. Long-term CDs offer stability and potentially higher returns over time, but they also come with less flexibility compared to other savings options. So, be sure to carefully weigh the trade-offs between the security of a fixed rate and the potential need for liquidity in the future.
And, it's important to remember that ultimately, diversification is a key principle in ensuring that your finances and investments are working hard for you. As such, it makes sense to consider incorporating long-term CDs as part of a broader savings and investment strategy rather than putting all your funds into a single account. That way, you can position yourself to benefit from today's high long-term CD rates while maintaining the flexibility to adapt to future economic changes.
