Here Are the Benefits of Opening a CD Now Following the Fed Rate Cut

The Federal Reserve cut its benchmark interest rate by 50 basis points, or half a percentage point, to a target range of 4.75% to 5% at the latest Federal Open Market Committee meeting on Wednesday. It was the first cut in more than four years since the Fed set rates near zero percent during the coronavirus pandemic. It also marks two years since the Fed began raising rates in March 2022 to fight inflation.

The Fed’s rate hikes have notably driven up the cost of borrowing, which is why interest rates on mortgages and credit cards are so high. In contrast, yields on deposit accounts, including certificates of deposit (CDs) and savings accounts, have skyrocketed as banks have begun offering annual percentage yields (APYs) not seen in decades.

But with the recent rate cuts (and more expected), we’re seeing a reversal in the returns on deposit accounts. In that regard, you may be wondering: Is it still worth opening a CD? For the right CD, the short answer is yes, but it depends on your unique financial needs, not just a high APY.

Now that the Fed has made its first rate cut in four years, there are still opportunities to open CDs at competitive rates, despite falling yields. Here are the benefits of continuing to shop around and what to look for if you want to open one now.

What are the benefits of opening a CD now?

Now that inflation, currently at 2.5%, is moving closer to the Federal Reserve’s 2% target, the central bank is poised to continue lowering interest rates, although the exact pace of those cuts remains to be seen. But we do know that several banks have responded by lowering the annual percentage rates (APYs) on various deposit products.

As such, we’re likely to see substantial declines on many high-yield deposit accounts, including high-yield savings accounts, in the coming months — and therein lies the benefit of locking in a high-yield CD now.

Overcoming future rate cuts

Interest rates on checking, savings and money market accounts are variable, meaning they can change at any time. So while your savings account may have generated a competitive return when you opened the account, it may generate much less later.

In contrast, when you open a CD, you receive the advertised yield for the entire term of the CD. So opening a CD now, while interest rates on deposit accounts are still relatively high, ensures that you will continue to receive a high yield even if the Federal Reserve continues to cut rates and, by extension, banks begin to lower yields on deposit accounts.

Outpacing inflation

And of course, you also have to factor in inflation. Ideally, you want a deposit account that earns more than inflation, which helps avoid the eroding effect of inflation on your dollar. But you can’t guarantee that your savings or money market account will continue to earn more than inflation, because banks can change their annual percentage rate at any time.

With a CD, you know exactly how much you’ll earn over a set period of time. CD terms typically range from three months to five years, giving you the flexibility to choose an account that outperformes both inflation and future rate cuts. Particularly with longer terms, you can ensure your money continues to generate returns from 2024, even as we move into 2025 and beyond.

What should you consider when opening a CD right now?

Of course, a high APY is a big factor when opening a CD, but there are others to consider.

In general, here are the main elements of a CD: yield, minimum deposit required, contract term, and early withdrawal penalty. You’ll need to balance each of these factors to meet your specific needs.

In terms of yield, CDs with APYs around 5% or above 5% are particularly competitive right now.

The minimum deposit required for a CD is typically $1,000, although some CDs require less and others more. You’ll need to balance the amount you deposit with the term of the CD, as you’ll need to consider how long you can keep your money in the account without having to withdraw it. Unless you open a penalty-free CD, you’ll likely be hit with a penalty if you withdraw your money before the CD matures.

Additionally, if your primary goal is to choose a CD that will outpace inflation and future rate cuts, you’ll want to consider CDs with very high yields and terms of a year or more. CDs with shorter terms won’t give you as much bang for your buck right now unless you’re willing to set up a CD ladder, meaning you’ll open multiple CDs with different maturity dates.

“The ability to lock in a multi-year CD at a return that is expected to far outpace inflation is particularly attractive to retirees looking to generate income, address specific cash flow needs in the future or diversify an overall portfolio,” said Greg McBride, CFA, Bankrate’s chief financial analyst. “But you have to be able to live without that money for the entire term of the CD.”

Particularly attractive CDs ahead of the Fed rate cut that still offer high yields include:

• Quontic: 6-month CD at 4.60% APY

• CIBC Bank USA: 1-year CD at 4.81% APY

• Bask Bank: 2-year CD at 4.00% APY

• Synchrony Bank: 3-year CD at 4.15% APY

• Alliant Credit Union: 5-Year CD at 4.00% APY

Note: CD prices are accurate as of September 20 and are subject to change at any time.

The essentials

Annual percentage yields on deposit accounts, including CDs, are expected to decline further after the Federal Reserve’s recent interest rate cut. With more rate cuts on the horizon, buying a high-yield CD now can help protect you from the rate decline we’re entering. Choosing a CD with a term of one year or more will be especially helpful in achieving this goal. And if you have enough cash to set up a CD surrender plan, it may be the best choice.