Should you open a CD before the next Fed rate hike?
Interest rates could be heading up after a pause in June. At least that's what it appears like ahead of the Federal Reserve's next meeting later this month.
Specifically, minutes released from the Fed's June meeting noted that some officials were supportive of raising rates then, by one-quarter of a percentage point. While that sentiment was ultimately overruled by the 11 voting members of the Fed's interest-rate-setting committee, the likelihood of keeping rates untouched in July seems small. In fact, many experts expect that they will raise rates at least twice more in 2023.
While higher rates make everything from credit cards to mortgage refinancing more expensive, they do have one benefit: Higher interest rates on savings vehicles like high-yield savings and certificates of deposit (CD) accounts. Rates on these accounts are higher now than they have been in years, making them an attractive option in an otherwise uneven economic climate.
But with another Fed rate hike looming should you open a CD now or should you wait? Start by exploring your CD options here to see how much more interest you could be earning.
As most experts will tell you, timing the market is difficult, if not impossible. And timing the planned actions of the Federal Reserve is arguably equally as hard. If you think you could potentially earn a higher APY on a CD by waiting for the Fed's next rate hike then it may make sense to wait for that decision. But if you wait until then you'll essentially be losing money in the interim.
Interest rates on CDs now are in the 3% to 5% range or higher, depending on which lender you choose and other factors. While you may be able to secure a marginally higher rate following the Fed's next bump you will have also lost out on any interest you could have earned by opening a CD prior to that decision. And if the Fed decides to keep rates as it you will have waited for no appreciable benefit.
That's why it may make sense to open a short-term CD now. These CDs, which range in terms from three to 12 months, can capitalize on the high rate environment while still giving you the flexibility to move your money into a higher rate earning account in the near future. You won't lock your money away to the point where you can only access it once rates have dropped; at the same time at least you'll be earning interest at the prevailing high rate. That's still exponentially better than leaving it in a regular savings account, which is earning a paltry 0.42% APY, according to the latest FDIC numbers.
In short: Yes, you may be able to earn a greater interest rate by waiting for the Fed's next increase. But you'll also be losing money by not putting at least some of your funds into a high-rate CD now. So you may be best served by opening a short-term CD now and ladder your funds so that they expire in time to open a new CD at the presumably higher rate.
Explore your CD account options here now and start earning more interest today!
While a high interest rate now - and a potentially higher one in the future - is a compelling reason to open a CD, there are other multiple advantages to opening a CD. Here are two other reasons you may want to consider opening a CD now:
Not only does a CD come with a higher rate now - it will keep it for the duration of your CD's term, regardless of any changes by the Fed or in the larger economy. Unlike rates on high-yield savings accounts, for example, which are adjustable and will change daily, interest rates on CDs are locked in until the CD matures, providing savers some predictability and security in what has been an otherwise volatile rate environment.
Not only is a CD FDIC-insured up to $250,000 per account, per institution - it's also protected against any withdrawals or usage you would otherwise access your savings for. It can be tempting to tap into readily available funds to use them for expenses you could do without. By putting that money into a CD you won't be able to use them for unnecessary purchases, thus letting your money grow at a high rate, uninterrupted by any daily temptations to use it.
Learn more about your CD options here now.
While it may be tempting to wait for the Fed's next potential rate hike to open a CD, now is actually a great time to do so. By opening a short-term CD, in particular, savers can immediately take advantage of today's high rates and start earning interest while also giving themselves the flexibility and knowledge knowing that they can move that money into a higher rate CD when it expires in the next few months.