CD Rates Could Stay High for a While. Here's Why That's Actually Bad News for Savers

As of March 18, 2024, the average rate on certificates of deposit (CDS) ranged from 0.22% on a 1-month CD to 1.81% on a 12-month CD. There are opportunities to earn much more with a CD, though. In fact, many of the best CDs are currently offering yields above 5.00%.

That was unheard of just a few short years ago. In fact, during the COVID-19 pandemic, the best rates were around or below 1%, and in the pre-pandemic times, a CD offering around 3% was considered a great deal.

While it's impossible to predict the future, rates could stay at this 5.00% level for at least a few more months and potentially for most of 2024. That's great news for savers, right?

Actually -- not really. Persistent high CD rates may be bad news for those with a lot of money in the bank. Here's why.

Here's why CD rates are so high

To understand why persistent high CD rates aren't good news for savers, it's helpful to understand why the yields are so high right now.

Rates aren't up for no reason. They rose sharply beginning mid-2022 because the Federal Reserve (the U.S. Central Bank) began to raise interest rates to fight rising inflation.

The table below shows inflation rates (year-over-year price increases), CD rates, and Federal Funds rates (the rate at which banks can borrow from each other overnight).

When inflation took off in 2021, the Fed reacted by raising rates in March, May, June, July, September, November, and December of 2022, and by raising them again in January, March, May, and July of 2023. CD rates went up along with the Federal Funds rate.

Here's why CD rates may stay high

Once inflation began to cool, the Federal Reserve paused rate hikes. And the Fed has actually signaled an intent to lower its rate, predicting three rate cuts in 2024. That may not happen, though.

That's because the Federal Reserve believes a sustainable rate of inflation is around 2.00%, and inflation remains stubbornly above that target. Further, the economy has stayed pretty strong even with today's high rates, showing solid job growth. That creates less pressure for the Fed to act.

Several Fed officials recently made clear they don't feel a need to cut rates any time soon, indicating they'd prefer more information about the direction of the economy first. And some officials expressed a preference for just one rate cut late in the year, or even none at all.

If the Fed doesn't lower rates, there's no reason to believe CD rates will fall. In fact, rate hikes have been paused since July of 2023, and CDs have continued to offer those competitive yields.

Here's why high CD rates are bad news for savers

If CD rates stay high, savers benefit right? They get to put their money into a CD offering 5.00% or more with no risk and earn a great return.

The problem is, if that happens, it's likely going to be because inflation is still above what the Fed prefers. The Federal Reserve chief, Jerome Powell, (along with several other officials) said hitting the inflation target is the key factor that will prompt the Fed to lower rates.

And inflation is generally bad for savers. When prices go up, money has to grow at least as fast as prices rise or you lose ground. And even if it grows just as fast or a little faster, you aren't really making much.

With a current inflation rate around 3.15%, all your invested funds must earn that much to break even. And even if every dollar is in an account paying 5.00%, your real return after accounting for inflation is just 1.85%. Unfortunately, most savers don't earn such high yields on all their savings, as 5.00% is well above the national average rate for both savings accounts and CDs.

To compound the problem, many people can't save as much in these high-yield accounts because they're stuck paying today's higher prices. And when the Fed does start cutting rates, savings account yields will fall but prices likely won't come back down; they just won't go up as fast as they have been. You'll be stuck with these elevated prices and no longer getting the 5% returns on your saved cash.

What should you do?

The best option you have right now is to put as much as you can in investments providing the best possible returns so you don't lose as much ground. To do that:

• Open a brokerage account and invest. If you have money you won't need for at least five years, it belongs in a brokerage account. While you can earn around 5.00% with some CDs right now, you can expect to earn 10% over the long haul if you put your money into an S&P 500 index fund (that's in line with the stock market's average return). That's a much better return on investment that will do more to help you maintain your buying power.
• Make sure your saved cash is beating inflation. You cannot afford to keep your money in a savings account paying less than what the current inflation rate is. If you're earning less than 3.15% APY, your money is losing value every day. Open a high-yield savings account today. The Ascent has a list of more than a half-dozen of the best savings accounts to choose from.
• Put as much money as possible into CDs. If the Federal Reserve does cut interest rates, savings account yields will fall, as they are variable. But CD rates are locked in for the length of your CD term. If you can keep earning 5.00% even as interest rates fall, you'll gain more ground. Just remember, you cannot withdraw funds from your CD early or you'll be penalized, so only invest money you're sure you can leave alone for the duration of the CD term. Check out The Ascent's top CD picks to find multiple options paying above 5.00%.

The sooner you make sure your money is properly invested, the better off you'll be, even if the Fed doesn't act and interest rates and CD yields both remain at their current levels.