3 reasons to open an 18-month CD before August
The interest rate climate could soon be changing. Thanks to a consistently cooling inflation rate (it dropped for the third consecutive month in June), borrowers could soon see relief on everything from mortgages to personal loans and credit cards. While that will be a major boost for those in need of extra financing, it will come at a cost for savers who have benefited from today's high rates.
Thanks to the Federal Reserve raising its federal funds rate to its highest level in 23 years – and keeping it frozen there since last summer – lenders have offered rates of 4% or higher on high-yield savings and certificates of deposit (CD) accounts. These rates were available on a variety of CD terms, ranging from short-term ones under 12 months to those up to a few years in length. Understanding the dynamics of the rate climate now, however, and the likelihood for rate changes to come, there's a compelling case to be made for opening an 18-month CD before August 1. Below, we'll detail three reasons why it's worth pursuing.
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3 reasons to open an 18-month CD before August
While CDs come in various terms, each with its own set of pros and cons, there's a strong argument for specifically opening an 18-month CD now. Here's why:
Rates are still high
Traditionally, interest rates have been higher on long-term CDs instead of short-term ones. While that hasn't been the case in recent years (short-term CD rates are generally higher now), it doesn't mean that longer CDs with terms like 18 months aren't worth considering.
You can get a 5% rate on a CD of this length right now if you spend some time shopping around and are comfortable with an online bank (which tends to offer the best rates to savers). A 5% interest rate could result in hundreds and possibly even thousands of dollars in earned interest over the lifespan of the account, depending on how much you deposit. But these high rates are unlikely to last much longer so it makes sense to lock in a high one now.
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A rate cut doesn't need to happen for rates to fall
There's a popular misconception that rates lenders offer will remain frozen until the Fed cuts its benchmark rate. And while those rates aren't likely to move dramatically minus any action on behalf of the Fed, a rate cut doesn't need to happen for rates to fall. Lenders can easily adjust what they offer savers and borrowers in anticipation of a formal rate cut to come (this is already happening with mortgage interest rates, for example).
So with many economists predicting an interest rate cut for September (the CME FedWatch tool projects a cut then with more than a 90% likelihood), and the knowledge that a rate cut doesn't need to occur for interest rates to drop, savers should strongly consider acting now before the talk of a rate reduction increases in August.
An 18-month CD still provides flexibility
Simply put, an 18-month CD provides the flexibility that other long-term CDs do not. A 2-year, 3-year, 5-year or 10-year CD could simply be too long for most savers to lock their money away and keep it untouched (you'll pay an early withdrawal penalty for premature access). An 18-month option, however, provides flexibility as the term won't be so long that it will exclude you from using the funds elsewhere. Plus, right now, an 18-month CD could offer the perfect combination of a high rate while also allowing savers to weather the economic headwinds that still need to be dealt with thanks to inflation and geopolitical and domestic concerns.
The bottom line
CDs, like high-yield savings accounts and other savings vehicles, need to be opened at the right time with the right term length for savers to truly benefit. And while much of the last two years have been optimal times to open these accounts, that window of opportunity could soon be closing. That's why savers should strongly consider opening an 18-month CD now, before August. By doing so they'll still be able to lock in a competitive rate and they'll circumvent any rate cuts to come - both if the Fed formally cuts rates and if lenders start reducing their offers in anticipation of official action to come. And with the flexibility an 18-month long-term CD provides compared to long-term counterparts, savers don't need to worry about losing access to their money for multiple years.
Just be sure to weigh the pros and cons of this unique term and be careful to only deposit an amount of money that you can comfortably part with for the full 18 months, otherwise any interest earned could be negated by the penalty you'll pay for withdrawing your funds before the term ends.
