Will CDs Still Be Worth Opening After the Fed Cuts Interest Rates?

I'm a big fan of free money, whether in the form of cash back from a credit card or a bonus from opening a checking account. So when CD rates started rising last year, I hopped on the bandwagon and opened a few to capitalize on them. 

The neat thing about CDs is that you can basically earn a risk-free return on your cash. This assumes that you put your money into an FDIC-insured bank. But as long as you do that and keep your deposit below $250,000, you don't risk losing any of your cash in the event of a bank failure. 

For this reason, I have a number of 5% CDs laddered. And I may even try to open one more before the Fed starts cutting rates. 

But to be clear, I won't necessarily stop buying CDs once those rate cuts hit. I think CDs could remain a good buy well beyond 2024 if they align with your financial goals.

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What's in store for CDs?

CD rates are high right now following a series of interest rate hikes from the Federal Reserve during 2022 and 2023. The purpose of those rate hikes was to slow inflation, which, for the love of $6 milk, really needed to happen. 

Thankfully, living costs are now rising at a more moderate pace, and because of this, the Fed is likely to start cutting interest rates later this year. There's pressure on the Fed to start lowering rates because those hikes have made borrowing expensive.

Once the Fed cuts rates, CD rates should follow suit. So while it may be possible to snag a 5% APY on a 12-month CD right now, after the Fed's first rate cut hits, that may be tougher. 

But all told, I don't expect CD rates to fall drastically later this year or next. Remember, just as the Fed raised its benchmark interest rate gradually in 2022 and 2023, so too will it likely cut rates slowly over many months or even years.

In other words, it's not like CD rates are expected to go from 5% this year to 3.5% early next year. It may be that come early 2025, you're looking at 12-month CDs paying 4.25%. That's still not a terrible deal.

Of course, it's harder to predict what CD rates will look like in the long term. But CDs may very well have a place in your financial strategy in the coming years, even if rates are lower.

When do CDs make sense?

In a nutshell, CDs tend to make the most sense when you're saving for a near-term goal, not a long-term one. For something like retirement, buying CDs could be a poor choice, because the stock market's average annual return over the past 50 years is 10%, which beats CDs by a longshot -- even when they're at their best. So when you're putting money away for a milestone that's 30 or 40 years away, investing in stocks usually makes more sense.

CDs are also not an appropriate place to put your emergency fund, since there can be steep penalties for cashing out a CD before it comes due. Your emergency fund should be kept in a regular savings account so you have access to it at all times.

But let's say it's 2028 and 12-month CD rates are only at 2%. If that's a good notch above what savings accounts are paying and you're saving for a near-term goal that makes stocks a poor choice due to the risk involved, then you might as well get that 2%. 

Right now, the idea of earning 2% on a 12-month CD is not appealing. I wouldn't blame you for thinking that, since you can still get 5%. 

But remember, you have to take CD rates in context year after year. If rates are down on a whole, CDs aren't going to be paying as much. Whether they'll be worth opening down the road will therefore depend on your goals and circumstances. But it's pretty fair to say that CDs will still be worth it in the next year or so, even if they're not paying nearly as generously as they are today.