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If you were looking for a secure way to earn a substantial return on your money in recent years, a certificate of deposit (CD) account was the clear choice. With interest rates on these accounts as high as 6% or 7% with select lenders — and a rate that was guaranteed for the full CD term regardless of any rate changes during that period — a CD was the smart way to go for millions of savers. But the approach savers took in 2022 and 2023 could soon be changing.
Inflation has plummeted from where it was in June 2022, for example. And the first interest rate cut since 2020 was just issued by the Federal Reserve in September, with others likely for when the Fed meets again in November and December. Understanding this changing dynamic, then, savers should take a strategic approach to CDs right now, while they’re still so favorable to open. That extends to opening a $10,000 CD now, before the November Fed meeting. Below, we’ll explain why.
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Why you should open a $10,000 CD before the November Fed meeting
Not sure if a $10,000 CD is worth opening before the Fed meets again on November 6 and November 7? Here are three reasons why it’s worth acting now:
High rates will continue to decline
CD interest rates are already on the decline and they don’t need a formal Fed rate cut to continue to drop. That’s because many lenders will start pricing in these reductions before they’ve officially been issued. So don’t wait for that to happen. If you open a CD now, you can still lock in a rate in the 4% to 5% range. Waiting, however, will likely result in you being offered a lower rate than if you had acted now. Depending on the term of the CD in question, that could add up to a significant difference in earnings potential over time.
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You can earn hundreds (or thousands) of dollars in interest
Sometimes, the best way to determine the value of a CD account is by simply calculating the potential returns. And that’s easy to do with a CD thanks to its fixed rate. A $10,000 6-month CD with a rate of 4.95% would leave you with around $244 in interest upon maturity. An 18-month CD, however, with a rate of 4.20% would earn around $636 while a 3-year CD with the same rate would result in a return of approximately $1,300. So you can still earn hundreds or even thousands of dollars in interest with a CD now, but that window of opportunity will continue to narrow as additional rate cuts are issued.
Protection against volatility
The economy is poised to change again and it’s difficult to predict with certainty what those changes will look like. Geopolitical tensions abroad, a U.S. presidential election at home, declining inflation and unemployment rates and a gradual drop in the federal funds rate will all result in a new economic climate — perhaps sooner than some expect.Â
Against this backdrop, then, savers could benefit from adding a layer of protection against this volatility with a CD. You won’t lose money by opening one and your rate won’t change during its term, as it would with a traditional savings account or high-yield savings account. And, depending on the term, you’ll be better positioned to weather any economic changes than you would be if you left your money in a different type of savings vehicle.
The bottom line
A CD is still a valuable financial tool for millions of American savers, but many of its benefits will wane if interest rates are continually lowered. It makes sense, then, to make a $10,000 deposit into a CD now, for all of the above reasons. Just make sure that when you do, you choose the right CD term. If you need your funds before the maturity date, you could risk having to pay an early withdrawal penalty to regain access.