In an era of economic inflation, the Federal Reserve has been diligently raising interest rates in an attempt to stabilize the economy. This action directly impacts the cost of interbank borrowing, subsequently causing an uptick in interest rates for mortgages, credit cards, and other financial products. However, this isn’t necessarily a losing scenario for consumers. In fact, for those with the capacity to save, these circumstances could mean better returns on savings accounts, particularly on certificates of deposit (CDs).
Currently, short-term CDs, especially 1-year CDs, are offering relatively high interest rates, with many paying above a 5% annual percentage yield (APY). This begs the question: Will these lucrative CD rates last? Could they surge even higher? Or, are they on the brink of a decline? While predictions can be complex and uncertain, expert consensus points in a clear direction for the future of CD rates, which will be explored further in this article.
The Future of CD Interest Rates Amid Rising Fed Rates
In the current inflationary period, the Federal Reserve has been increasing interest rates to temper the economy. This move has led to a rise in interest rates for mortgages, credit cards, and other loans. However, this situation isn’t entirely negative for consumers, especially for those with the capability to save. Higher yields are now available in savings accounts, particularly short-term certificates of deposit (CDs), which have seen an impressive increase, offering over a 5% annual percentage yield (APY).
Predicting the Future of CD Rates
Predicting the trajectory of CD rates can be challenging, but based on available data, experts have reached a consensus on the general direction. As inflation shows signs of slowing down, and with minimal anticipated rate hikes from the Fed, CD rates are expected to remain relatively stable for the rest of 2023. Billy Cho, market leader at Citi, suggests that CD rates may remain consistent or, at most, slightly higher. This is due to the Federal Reserve’s strong influence on CD rates and other types of banking rates.
If rates remain steady, it could incentivize savers to act quickly. Ben McLaughlin, US president at Raisin, advises savers to lock in some of the attractive high-interest 12- and 24-month CD rates currently available before they start to drop.
CD Interest Rates Predictions for 2024
In 2024, the situation for CDs may change. Experts predict a downward trend in rates, especially for short-term CDs, although this could change depending on economic conditions. If the Fed begins to cut rates, the dynamic of short-term CDs paying higher interest rates than long-term CDs could change. McLaughlin predicts that savers will start to see better rates in longer-term CDs as interest rates cool down.
Alternatives to CDs
Even with CD interest rates holding up, savers and investors may consider other financial products. Money market rates and T-bills are two alternatives to consider, as suggested by Jill Fopiano, president and CEO at O’Brien Wealth Partners. Investors worried about inflation can also consider I-bonds, which adjust upward as inflation rises. For those unsure about the term for their CD investment, building a CD ladder could help.
In the current economic climate, it is crucial to consider a diverse range of investment options, including CDs, Treasuries, stocks, and other assets. This approach helps mitigate the risk of unexpected changes in interest rates. Always compare interest rates, fees, and risk to optimize your investments. Lastly, consulting with a trusted advisor can provide valuable insights and guidance in making these decisions.