Payments from certificates of deposit (CDs) are already starting to decline in anticipation of benchmark interest rate cuts by the Federal Reserve later this year.
Thanks to their attractive APYs, CDs have become an increasingly popular and safe option for people to park their savings. However, the days of CD rates above 5% are probably numbered. In recent weeks, several major online banks, including Ally, Barclays, Discover, Marcus, Sallie Mae and Synchrony, have begun cutting rates on 12-month CDs.
For example, Barclays 12-month CDs now have an APY of 5.3% as of this writing, down from 5.5% last month. Likewise, Sallie Mae lowered its APY from 5.5% to 5.25% over the same period. Discover, Marcus and Synchrony have also cut CD rates in recent weeks.
During Ally’s latest earnings call on Jan. 19, Chief Financial Officer Russ Hutchinson said the bank had cut CD rates twice already in January and signaled more were coming in 2024.
Why are CD prices falling?
The APY you earn on your CD is based largely on the movement of the federal funds rate, set by the Federal Reserve. When the Fed began raising rates in 2022 in an effort to curb runaway inflation, a welcome side effect for savers was that APYs on deposit accounts, such as CDs, savings accounts, and money market accounts, they began to increase in tandem.
As the Fed’s strategy to tame inflation has proven largely effective — and consumer prices have moderated — the nation’s central bank is almost universally expected to begin cutting rates in 2024.
The question now is not Self the Fed will cut rates; rather, it is When and from How much. The Fed agreed on Wednesday to keep rates stable but will meet eight more times in 2024, giving it eight more opportunities to cut rates. According to the CME FedWatch Tool, most investors expect the Fed to start cutting rates at its next meeting in March.
Many bankers don’t expect rate cuts to happen until the second half of the year. However, with several cuts on the horizon, some banks have already begun preparing by lowering the APYs on their CDs, the terms of which could be locked in long after the Fed lowers rates.
Should you set high CD rates now?
While they differ on the exact timing of the Fed’s rate cuts, economists, investors and advisors all almost unanimously agree that the rate cuts will come in 2024. That means the APYs on CDs can’t go anywhere except downwards over the course of the year.
That said, CDs aren’t for everyone. Once you open a CD, you typically need to keep the money in the account for the period you select (often between one month and 10 or more years) for it to be a good investment.
If you withdraw money before the CD term expires, banks typically charge early withdrawal fees, which are penalties on the interest accrued at the time of withdrawal. These fees can significantly erode your advertised APY.
That said, CDs aren’t always the best place to place an emergency savings fund, since the money needs to be readily available in the event of major, unexpected expenses.
Lawrence Sprung, founder and wealth advisor at Mitlin Financial, recently told Money that one way savers can take advantage of attractive CD rates while keeping their savings liquid is through a strategy called CD laddering. In short, you can spread a portion of your savings across CDs with different terms, such as three months, six months, one year and five years.
“So you will have locked-in rates,” Sprung said. “You may get a blended rate that may not be the best rate available, but you will get close to it and also have some liquidity and availability for that money.”
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