Want the Highest APY on a CD? Here's Why Guessing the Fed's Next Move Is a Fool's Errand

One of the best reasons to open a certificate of deposit (CD) in 2024 is that interest rates are high and they might be about to go lower. Many financial industry experts agree that the Federal Reserve is likely to cut interest rates in 2024. The best CDs are offering annual percentage yields (APYs) of over 5.00% (as of Feb. 27, 2024). So if the Fed cuts interest rates later this year, that means now could be a good time to lock in a high yield on a certificate of deposit.

But no one knows for sure if the Fed really will cut interest rates, or how soon, or by how much. Just like knowing when is the best time to buy stocks, no one can be 100% sure that now is the best time to buy a CD.

Let's look at a few reasons why trying to read the minds of the Federal Reserve Board is a bad move for your personal finances.

1. Inflation is not done yet

The Fed raised interest rates throughout 2022 because it was trying to drive down high inflation by reducing the supply of money and making it more expensive for people and businesses to borrow. Inflation came down during the second half of 2023 compared to the highest price increases during 2022.

But according to recent consumer price data, the Fed's work of fighting inflation might not be done. New inflation data from January 2024 showed that consumer prices rose slightly more than expected. This could mean that inflation is not over. If consumer price data for February 2024 or March 2024 shows that inflation is rising again, or not coming down as fast as the Fed would like, the Fed might not cut interest rates anytime soon.

What does this mean for opening a CD in 2024? If you think the Fed is about to cut interest rates and you want the highest possible APY on a CD, opening a CD in February or March 2024 could be a good move. But if the Fed doesn't cut interest rates -- or it even raises interest rates in 2024 -- you might miss out on better APYs.

2. The Fed might raise -- not lower -- interest rates in 2024

Ever since the end of 2023, most Wall Street analysts and economists have believed that the Fed will cut interest rates in 2024. But if inflation continues to climb in the spring of 2024, that could cause the Fed to raise interest rates again. Experts cited by Bloomberg on Feb. 20, 2024 said that they see a 15% to 20% chance that the next move by the Fed could be a rate increase instead of a cut.

What does this mean for opening a CD in 2024? If the Fed raises interest rates after you've locked up your money in a CD, you could miss out on higher APYs. Some banks offer a special type of CD called a "bump-up CD," where you can increase your CD's APY if interest rates go up.

However, bump-up CDs typically pay a lower APY than you could get from a standard CD. For example, Synchrony Bank offers a bump-up CD with a 24-month term and 3.90% APY (as of Feb. 27, 2024). But Synchrony's 24-month standard CD pays 4.20% APY. Do you think interest rates will go up enough in the next two years to be worth giving up that 0.30%?

You might also consider opening a shorter-term CD. The best 3-month CDs offer 5.00% APY or higher (as of Feb. 27, 2024). This would give you more flexibility to move your money to a higher-yielding account in case the Fed hikes interest rates in the next few months.

3. High-yield savings accounts are flexible and paying great APYs

I'm not opening any CDs in 2024 no matter what the Fed does next. That's because I'm at a point in my life where I value the flexibility of a high-yield savings account (or money market account) more than I value the slightly higher APY of a CD. I don't want to lock up my money in a CD. If the Fed cuts interest rates in 2024 and my savings account APY goes down, I don't care -- because I need my money in a flexible, 100% accessible bank account.

And if the Fed surprises everyone by raising interest rates in 2024, I still don't care. I'll just keep earning that higher APY on my savings account. And I don't have to waste time or effort trying to read the tea leaves or time the market.

What does this mean for opening a CD in 2024? Keep in mind that even the best CDs don't pay much better APYs than the best high-yield savings accounts. For example, as of Feb. 27, 2024, the best high-yield savings account is offering 5.32% APY, and you don't have to lock up your money for months or years. Can your CD beat that?

Bottom line

Don't assume that CDs are the only way to grow your savings. The Fed might cut interest rates, but no one knows for sure, and economic data can be unpredictable. Unless you're a professional bond trader, there's not much to be gained by trying to out-guess the Fed. Make the choice that's best for your personal finances. High-yield savings accounts are a safe, flexible option to keep your cash, with APYs that sometimes beat the best CDs.