What could happen to CD interest rates this October? Here's what experts think.
Certificates of deposits (CDs) have become a popular investment in the post-pandemic era and it's easy to see why. CD rates soared as the Federal Reserve raised the benchmark interest rate to fight inflation. While high-yield savings account rates also climbed, many borrowers opted for CDs over savings accounts because savings account rates are variable while CD rates are locked in.
CDs may be losing their allure, though, as a recent Fed rate cut means there are now fewer options for CDs offering yields above 5.0%. For borrowers wondering whether to open a new CD or savings account before the Fed cuts rates again, it can be helpful to see where experts think rates will trend this October.
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What could happen to CD interest rates this October?
Here's what some experts are predicting for the CD interest rate landscape this month:
CD rates are likely to decline this month
While lower inflation data may be good news for consumers as a whole, investors who jumped at the chance to buy FDIC-insured CDs at great rates are likely to be disappointed with how current economic trends are impacting CD yields in October and beyond.
"'We believe CD rates are set to decline in October," says Gary Quinzel, Vice President of Portfolio Consulting at Wealth Enhancement Group. "Three-month CDs move in virtual lockstep with the Fed Funds Rate, which was lowered by 0.50% in September, and markets have priced in as much as 0.75% in additional cuts through December."
Jonathan Ernest, an economics professor at Case Western Reserve University agrees. "CD rates, especially for short durations of three months and one year tend to react quite quickly, and correlate quite closely, with changes in the federal funds rate," Ernest says. "As consumers expect these lower rates, we may see an increase in demand as they try to lock in a relatively high return now, before yields fall. This increased demand should push rates of return lower."
It's not just short-term CDs likely to see rate declines either. While the Fed Funds rate has a bigger impact on short-term CDs, the outlook for long-term CDs also isn't favorable.
"Yields for longer-term CDs are likely to come down from recent highs as well," Ernest says. "The yield necessary to satisfy demand will depend on expectations of how the economy will perform, and whether the Fed will maintain its announced path of rate-cutting, over the coming years."
Quinzel also believes there are reasons to expect long-term CD rates to fall beyond just the Fed's actions.
"Longer term CD yields are also impacted by other factors such as the risk associated with a particular bank," he explains. "Each bank has unique considerations such as their profitability, business model, geographic location, and client base-- all of which can impact the yield on a CD. However overall financial conditions remain supportive, that is looser than average, which suggests that stress in the banking system should not contribute to higher CD yields in the immediate term."
Signs of economic slowdown, including higher unemployment rates, could also create lower demand for loans which will create even less incentive for banks to offer attractive yields on short-term or long-term CDs, Quinzel says.
Lock in a high CD interest rate while you still can now.
Investors have a chance to lock in a rate before it falls further
While CD investors won't be happy to say goodbye to the high rates they've enjoyed in the post-pandemic era, that doesn't mean it's time to give up just yet. In fact, October may present one of the last, best chances to lock in before rates decline further.
Quinzel predicts that rates are likely to "continue to fall through the end of the year, and probably well into 2025," and Ariana Meiser, Market President at Merchants Bank agrees.
"CD rates are likely to keep going down mainly because the Federal Reserve has lowered its key interest rate," Meiser says. "When the Fed cuts rates, banks usually follow by reducing the interest they offer on savings products like CDs. This happens because banks earn less interest on the loans they give out, so they need to lower the interest they pay on deposits to stay profitable."
Today, there are still opportunities to open high-yield CDs with rates topping 4.00%. If you act now, those rates will be locked in for the duration of the CD term. With experts predicting ongoing declines in CD yields, those opportunities may not be available for long.
"Unless inflation data reverses substantially higher, which we do not anticipate, the Fed appears set to lower rates to around 3.25% or 3.5% by the end of 2025, which should be the benchmark of where CD rates are heading," Quinzel predicts.
If you don't want to miss the boat on CDs and lose your last chance to lock in at today's higher yields for months or years to come, acting sooner rather than later and loading up on CDs now is likely your best move.
