What Will Rate Cuts Mean for CD Rates in 2024?

Inflation has been a persistent problem for U.S. consumers over the past few years. Thankfully, though, it's starting to cool.

The Federal Reserve is happy about that. Its goal has been to bring annual inflation down to around the 2% level, which is the level it typically targets in the long term.

In December, annual inflation, as measured by the Consumer Price Index, was recorded at 3.4%. Now, there's still a clear gap between where inflation is at and where the Fed wants it to be. But the situation is improving.

As such, the Fed opted to pause its rate hikes during its last three meetings of 2023. Not only that, but late last year, the central bank forecast three rate cuts for 2024.

Rate cuts could be good news for consumers from a borrowing perspective. But from a banking perspective, less so.

The upside of rate cuts

The Fed's string of interest rate hikes that took effect in 2022 and 2023 did the job of cooling inflation by driving the cost of borrowing up. After all, for inflation to calm down, consumer spending needs to decline -- and that's likely to happen when it costs more to borrow money.

If the Fed cuts interest rates in 2024, it could make loans less expensive to sign. It could also make credit card balances less expensive to carry. So all told, rate cuts could make it so that borrowers have much to celebrate.

The downside of rate cuts

If the Fed ends up cutting rates in 2024, it means banks will likely start paying less interest on products like savings accounts and certificates of deposit (CDs). Not only that, but longer-term CD rates might really become notably less attractive. That's because banks may be leery of committing to higher rates over a lengthy period of time knowing that more rate cuts on the Fed's part could be in store.

It's for this reason that you may want to lock in a CD now, before any rate cuts happen. And if you're interested in a longer-term CD, definitely move sooner rather than later.

CD rates could move quickly

It could take as little as one rate cut for 3- 4-, and 5-year CDs to experience a big drop in rates. So if you know for a fact that you're able to commit to a CD of that sort of term, lock in your rate now, while it's higher.

What's more, if you opened a CD that will be coming due at some point this year, pay attention to its renewal date and see what CD rates look like at the time. Some banks will automatically roll a CD into a new one with the same term if you don't take action. But if CD rates are less attractive, that may not be what you want.

Let's say you have a 1-year CD coming due in mid-2024, and your initial CD rate was 5%. It may be that 1-year CDs are only paying 4% at the time you have the option to make a change. If that's not a rate you're happy with, you'll have an opportunity to cash out your CD at its maturity date rather than renew it -- but you'll need to let your bank know before that date arrives. You can usually do so by logging into your account and making an election.

All told, rate cuts could offer a lot of relief for borrowers in 2024. But it's savers, unfortunately, who may lose out. So now's a good time to lock in a CD, whether it's for a 1-year term or a 5-year term. The longer you wait, the lower the rate you might end up with.