For more than a year, savers have been able to find certificates of deposit, or CDs, that offer annual percentage yields (APYs) of 5% or more.
But those days may be coming to an end.
With the Federal Reserve expected to cut interest rates in September — and possibly several times before the end of the year — this could be the last chance for savers to lock in the 5% APY CD.
To combat post-pandemic inflation, the US banking system raised interest rates 11 times from March 2022 to July 2023, making borrowing more expensive for consumers and slowing the economy. But higher benchmark interest rates also mean better returns in savings accounts like CDs.
A CD is an account insured by the Federal Deposit Insurance Corporation, or FDIC, with a fixed term and fixed interest rate. CD terms are as short as three months but can extend up to 10 years.
These accounts are not as liquid as other savings options and often come with early withdrawal penalties, so investing in a CD is best suited for people with cash that they won’t need to access until the end of time.
Why are CD prices falling?
Banks and credit unions have lowered rates on CDs through 2024, and that trend is likely to continue.
Market observers expect the federal funds rate to be 75 basis points lower by the end of the year than it is now, according to CME Group’s FedWatch tool. Generally speaking, if the Fed cuts interest rates, you can expect CD rates to drop significantly.
Currently, some banks still offer 12-month CDs with APYs of 5% or more, but the list is as long as it’s ever been.
In January, Barclays, Marcus and Sallie Mae were advertising APYs of 5.50%. As of Wednesday, Marcus and Sallie Mae were down 5.15%, while Barclays was at 5%.
Discover’s 12-month CD APY fell from 5.20% to 4.70% during that period, while Synchrony’s 12-month CD APY fell from 5.30% to 4.8%. In January, Ally was offering 5.25% APY on 12-month CDs, which recently dropped to 4.50% – a significant drop.
Ally’s chief financial officer, Russ Hutchinson, said on the first-quarter earnings call that “a good product mix and an overall value proposition has kept us competitive from a price point of view on the way up and puts us in a leadership position on the way down.” On an earnings call Wednesday, he said Ally’s next steps “will depend to some extent on the Fed’s rate moves.”
Should you lock in the value of the CD?
According to Bryan Johnson, chief financial officer at CDValet.com, it’s unclear where CD APYs are headed through 2024 due to the uncertain rate environment. The trajectory, however, appears to be flat.
“CDs have been very attractive compared to other guaranteed principal options, such as Treasuries, which has not always been the case,” he wrote in an email to Money. “As a result, it’s a good time to buy a CD and lock in more yield.”
Long-term CDs currently have lower rates than 12-month CDs. For example, Ally’s 3-year CD has a 4% APY compared to the 4.50% APY for the 12-month option. Banks offer lower APYs on these CDs because they don’t want to be stuck paying above-market rates if the Fed continues to cut.
Despite the difference in APYs, Johnson says he currently favors long-term CDs, which allow you to lock in rates that may not be available in a few years. However, the pros and cons of different CDs vary depending on the individual and the time horizon of their savings.
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