What will happen to short-term CD rates in 2024?
The Fed's recent 11-hike cycle left the federal funds rate at an elevated rate of 5.33%. While there hasn't been an increase since July 2023 thanks to cooling inflation, the current rate is still higher than it's been since 2001.
As a result, many Americans are anxiously awaiting rate decreases so their borrowing costs will go down. Others, however, have been taking advantage of the higher rates through interest-yielding savings and certificate of deposit (CD) accounts.
If you've been investing in CDs, you may have noticed the general shape of the yield curve has inverted, meaning shorter-term CDs have higher rates than longer-term ones. Below, we'll break down why experts say this is happening and how it may change in 2024.
If you're considering a CD then start by exploring your rate options to determine how much more you could be earning.
What will happen to short-term CD rates in 2024?
Under normal circumstances, the longer you agree to leave funds in a CD account, the more interest you can earn.
"Historically, long-term CDs typically offered higher interest rates, reflecting the commitment required from depositors to keep their funds locked in for an extended period," says David Donovan, the executive vice president and head of financial services at Publicis Sapient.
So why are shorter-term CDs paying higher rates than longer-term CDs right now?
"Over the past two years, short-term CDs have seen higher rates primarily due to the economic uncertainty and the Federal Reserve's response to inflation," says Taylor Kovar, CFP, the founder and chief executive officer at Kovar Wealth Management.
"In uncertain times, banks are hesitant to lock in long-term rates, leading to higher rates for short-term CDs as a way to attract depositors without committing to long-term payouts," Kovar says.
See what short-term CD rate you could secure here.
Now that interest rates are expected to decrease, what will happen to short-term CD rates in 2024? Kovar says it's going to depend on several factors.
"The traditional model where long-term CDs offer higher rates than short-term ones could return as economic stability is restored," says Kovar. "This shift would likely occur once inflation is under control and the market adjusts to a new normal."
However, he explained that the timing of this shift is uncertain and will depend on a range of factors including economic growth, inflation trends and monetary policy decisions.
"If the Fed continues to raise rates to combat inflation, we might see short-term CD rates remain elevated in 2024. However, if inflation begins to cool down, there could be a stabilization or even a decrease in these rates," Kovar says.
Should you open a CD now?
Opening a CD now can be advantageous because it'll allow you to lock in an elevated interest rate before rates drop. As long as you open the account and secure the rate, you'll be able to keep it throughout the full term of your CD contract.
"Over the last year, short-term CD rates have been very competitive due to the interest rate hikes. It's still a great time to purchase a short-term CD while rates are highly competitive," says Jordan Mangaliman, the chief executive officer of Goldline Financial Services. "If you see a rate you like today, take it."
