Could CD Rates Rise Again in 2024?

It's a really, really good time to open a certificate of deposit (CD) if you happen to have the money. The Federal Reserve spent much of 2022 and 2023 raising interest rates in an effort to slow the pace of inflation. And the Fed's tactics worked.

These days, living costs are still inflated, but they've been rising at a far more moderate pace than what we saw in 2022. And the Fed is hopeful that it will soon be in a position to cut interest rates, thereby providing relief for borrowers.

But while those interest rate hikes made it more expensive to sign a loan or carry a credit card balance, they worked wonders for savers. Thanks to those hikes, CD rates are sitting at the highest levels we've seen in years, with many CDs paying somewhere in the vicinity of 5%.

Of course, when you open a CD, you run the risk of potentially missing out on a higher rate a few months down the line. So you may be wondering if it pays to open a CD now versus wait a few months and see what happens.

But based on economic conditions, it's unlikely that the Fed will raise interest rates anytime soon. So the likelihood of CD rates rising this year from where they are today is pretty slim, which means that the time to open your next CD is now.

It pays to act sooner rather than later

The Federal Reserve has long targeted 2% inflation as its annual benchmark. The central bank feels that this particular level of inflation is conducive to long-term economic growth and stability.

The Fed is hoping that inflation will inch closer to the 2% mark as 2024 moves along. As of March, annual inflation was being measured at 3.5%, per that month's Consumer Price Index. Once that happens, the Fed may be in a position to start cutting interest rates.

But even if that doesn't happen very soon, it's unlikely that the Fed will want to raise interest rates again. In fact, the Fed opted to leave interest rates unchanged for its past six consecutive meetings. So barring a really jarring change in the inflation rate, interest rates are likely to only go down from where they are today.

That's why waiting on opening a CD doesn't really make sense. Of course, it's one thing to wait because you don't have the money or aren't sure of your financial plans just yet. But don't wait to open a CD because you think rates are going to get better. That's not very likely. And if you wait for that reason, you could end up stuck with a lower rate.

Consider your CD term carefully

Because the Fed is expected to lower interest rates at some point in 2024, banks are being more cautious about longer-term CD rates than shorter-term rates. So while you might find a 12-month CD with a 5% APY, a 60-month CD might only pay 3.8% or 4%.

You may be inclined to go with a 12-month CD in this scenario, since that's a higher rate. But remember, today's CD rates are not the norm. In a year or so from now, you may not be able to find a CD rate that's close to today's rates, based on how inflation shakes out. So don't automatically assume that a longer-term CD is a poor choice because its interest rate isn't as high as a shorter-term CD.

Case in point: Let's say you put $5,000 into a 12-month CD at 5%. That will earn $250 in interest. But what if by the time that CD comes due, 12-month CD rates are down to just 3.5%? Over the next year, you're only earning $175 on a 12-month CD (assuming you only put $5,000 into that CD, as opposed to $5,000 plus the $250 you earned in interest). And then if 12-month CDs pay just 2.5% the following year, your interest earnings there are $125. So that's $550 worth of interest over three years.

Meanwhile, let's say you put $5,000 into a 60-month CD at 4%. There, you'll earn $200 in interest per year over the next three years, bringing your total to $600. Again, this is a simplified example that does not account for earned interest on your interest, but the point is to illustrate that if you can commit to a longer-term CD, it may be a good idea to do so.

All told, CD rates are unlikely to climb from where they are today. So if you have the money on hand to open one, don't wait.