Short-Term CD Rates May Have Already Peaked. Here's Why You Shouldn't Wait to Get Yours

Between March 2022 and September 2023, something amazing happened: For every month within that period, CD rates progressively increased. 

Indeed, thanks to the Federal Reserve's campaign against inflation, which led to the greatest round of interest rate hikes we've seen in over two decades, rates on short-term certificates of deposit went from decimals to well north of 5% within 18 months. Not too long ago, you could find CD rates between 5.50% and 5.80% on the financial platform Raisin, while some credit unions were even offering 6% APYs on their CDs. 

But, just as quickly as they came, so too CD rates could drop off. Some indications show that CD rates may have already peaked and could be falling, which would make now the ideal time to lock into a rate before they do. 

Some short-term CDs may have hit their peaks in September

Data from the Organization for Economic Co-operation and Development shows that 90-day CD rates may have started dropping. While it's too early to tell if this is a steady trend, it appears as if 3-month CD rates started heading south in October. For perspective, here's how they've changed since the beginning of 2023. 

I've also started to notice a quiet descent in CD rates. In November, for instance, I saw a 6% APY offer on a short-term CD, which seemed to indicate that CD rates were still growing. But as soon as the Federal Reserve had its December meeting, in which it kept interest rates the same, I began to see fewer and fewer attractive offers. Even the CDs on Raisin, which were boasting APYs between 5.50% and 5.80%, have started to decline. As of writing this, the highest CD offer is 5.50%, which is still great but not as high as I've seen on the platform. 

Why are short-term CD rates falling? 

The Federal Reserve has not cut the federal funds rate just yet. So why would short-term CD rates start to fall? 

To answer that, recall that the sudden rise of CD rates was an indirect cause of the Federal Reserve's fight against inflation. Hiking up the federal funds rate -- which financial institutions use to help set their own rates -- makes borrowing more expensive, which then discourages people and businesses from spending money. Less demand means fewer goods are sold, which slows down the rate at which prices rise. 

For the most part, this policy worked. Since about June 2022, annual inflation dropped steadily from 9.1% in that month to about 3.1% in November 2023. During this time, the Fed was clear that it would do whatever it took to slow the growth of inflation, including an unspecified number of interest rate hikes. 

Now, we're in the opposite situation. Inflation, though not completely under control, nonetheless looks more tame, which is why many Fed policymakers are projecting at least three quarter-percentage-point cuts in 2024. I'd venture to guess that banks are expecting more than three rate cuts next year, especially if annual inflation drops faster than the Fed expects. It's because the future looks a little rosier that the Fed is becoming less hawkish, and it's because of that change in sentiment that CD rates have started to drop. 

Should you get a CD now? 

The central bank's monetary policy is still fluid and could adapt to changing economic conditions. While our current economic circumstances make it likely that the Fed will cut interest rates, it hasn't done so yet. 

Even so, if you're shopping for CDs, I wouldn't hesitate to get one soon. The most lucrative CD rates may already be behind us, making whatever high APY you find now the next best offer. If you have a wad of cash just sitting in a savings account, now might be the best time to lock in these high rates before they drop even faster. Take a look at some top-paying CDs and build out a CD ladder ahead of 2024 before it's too late.