Why You Should Lock in a CD ASAP After the Fed's Latest Decision

Many consumers had to tighten their budgets in 2022 as inflation surged. Thankfully, inflation has been cooling since then. But a lot of the damage has already been done. At this point, many people are grappling with the costly debt they had to incur just to put food on the table and keep up with basic expenses.

Adding insult to injury was the fact that the Federal Reserve understandably felt compelled to raise interest rates numerous times in 2022 and 2023 to slow the pace of inflation. That made borrowing more expensive for consumers, and caused many of those with existing credit card balances to accrue additional interest. 

But the Fed's interest rate hikes did one great thing for consumers -- they made keeping money in the bank a more lucrative prospect. These days, savings account and CD rates are elevated following the Fed's string of interest rate hikes. Once the Fed starts lowering rates, savings accounts and CDs are apt to start paying less.

Meanwhile, the Fed just announced at its May 1 meeting that it's not ready to move forward with interest rate cuts just yet. And while that's not the best news for borrowers, it's great news if you've been interested in opening a CD and just haven't gotten around to it yet.

The time to open a CD is now

The benefit of putting cash into a CD, as opposed to a regular savings account, is that you get to lock in your interest rate for a preset period. That's a good thing right now, because interest rates are likely to drop at some point this year once the Fed lowers rates.

For example, you may find a high-yield savings account paying 4.3%. That's a great rate, but if the Fed moves forward with rate cuts in the coming months, by December, you could be earning well under 4% on your money. If you open a 12-month CD at 5%, you're guaranteed 5% for the duration of your CD's term. So it's a good idea to open a CD now, before the Fed decides to implement its first rate cut in years.

A short-term CD might offer a better rate, but a long-term CD could make more sense

Since the Fed is expected to cut rates at some point in 2024, you'll generally find that shorter-term CDs have higher rates than longer-term ones right now. As an example, at Capital One, you can lock in a rate of 4.25% on a 6-month CD. A 5-year CD will only pay you 3.90%. 

But remember, if you go with a 5-year CD, you're getting that 3.90% for the next five years. Interest rates are more likely than not to fall, and keep falling, in the coming half-decade. So while you might lose out on a bit of interest in the near term by opting for a longer-term CD over a shorter-term one, if you have a mid-term goal you're saving for, a 5-year CD could be a good bet.

For example, let's say you've just started to save for a home and know for sure that you don't intend to buy one for about five or six years. In that case, a 5-year CD could make sense for you. 

Similarly, if you have a child starting college in about five or six years, investing your education savings in stocks could be risky because you don't have a ton of time to ride out a market downturn. So in that scenario, a 5-year CD could also be a good bet.

We don't know when the Fed will start lowering interest rates this year. The central bank is set to meet again in mid-June, so that's its next opportunity. 

As such, the CD rates you're seeing right now may remain in place for about another month and change. But there are a lot of question marks around that June meeting, so if you're interested in locking in a CD, the time to do so is now.