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At the end of July, the Federal Reserve will meet again to discuss the future of interest rates. So far, the Fed has kept the federal funds rate locked. While there has been some pressure on the agency to cut rates in July, current projections show that it may still be unlikely. The CME Group’s FedWatch tool currently has a less than 5% probability of cutting rates in July.
Currently, interest rates remain elevated. Savers can benefit from these higher rates through a certificate of deposit (CD) account, which comes with a fixed rate throughout the term. However, further rate cuts are on the horizon, even if they may not be imminent for this July. So, should you lock in a CD rate in July or wait? We spoke with several experts about what to consider.
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Should you lock in a CD rate this July or wait?
A CD account can be a valuable savings tool. You can park your money in a CD for a specific term length and earn a fixed return on your deposit. That predictability is appealing in such an uncertain environment. However, CD accounts don’t come with the same flexibility as a high-yield savings account. To avoid early withdrawal penalties, you must not touch your deposit for the duration of your term. Whether or not you should make this trade-off and open a CD account in July depends on several factors:
Your liquidity
Before you lock in a CD interest rate this July, review your liquidity. While CDs allow you to lock in your rate, you also lock up your funds. Accessing them before the CD term ends could trigger early withdrawal penalties.
Jordan Banning, certified financial professional at Crafted Financial Planning, recommends that you “first focus on your needs and situation, rather than trying to time markets or be tactical.”
So instead of trying to get the highest rate possible, make sure you’re set up for success and have a strategy. “For example, if you don’t have at least three months of expenses set aside in an emergency fund, I would prioritize using a high-yield savings account over a CD – leaving those funds more liquid and not subject to penalties if you need to access the money,” adds Banning.
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Your goals
If you have a liquid emergency fund, a CD account can be a good place to put funds for a specific goal. Locking in a CD rate now can make sense if you have money set aside, but don’t plan on using it right away.
“They’re great for planned upcoming purchases like setting aside funds to buy a car after you graduate or leaving the down payment on a house until your rental lease is up,” says Banning.
You can align your CD term with when you plan on making the purchase. The benefits of using a CD for your goals are twofold. First, you can get a fixed CD rate and predictable returns. Secondly, you can keep those funds safe and reduce any temptation to touch them because of early withdrawal penalties.
Current CD rates vs. future CD rates
If you’re looking to lock in higher rates, this July can be a good time to open a CD. The Fed is meeting this month and while current predictions show no changes, it’s always been a bit of a guessing game. Even so, the Fed may slash rates later this year. Because of that, banks may start reducing rates in anticipation of future rate cuts.
“I think if we’re going to see rate cuts, they’re going to be later in the year, probably September or later. And what that means is that if an investor locks in a CD now…they will secure one of the higher yields currently available. Once the Fed begins to cut rates, future CD issues will reflect those lower rates,” says Peter C. Earle, Ph.D, director of economics at the American Institute for Economic Research.
Given the current CD interest rate forecast, getting in now while certificate of deposit rates are high can boost your returns and ensure you’re not missing out on additional growth.
Term length options and CD rates
CD terms vary from a few months up to five years. If you’re weighing the pros and cons of opening a CD right now, consider when the CD term ends and review the CD interest rates.
Usually, banks would offer higher CD interest rates on long-term CDs. The idea is that you’re locking up funds for a longer period of time, so you should earn more because of that. However, given the current interest rate environment, you won’t see that reflected in current CD account rates.
“Shorter-term CDs are frequently yielding more than longer-term ones, and that is a result of the inverted yield curve,” says Earle.
If you want the highest CD account interest rates, opting for shorter-term CDs is likely your best bet. Though long-term CDs may have lower rates relative to shorter-term CDs right now, all rates are likely to fall soon, regardless of the term length. So locking in either short-term or long-term CD rates can be a smart idea. You don’t have to choose one or the other, either.
“We do think it’s a good time to lock in rates. We would recommend laddering CDs. So the way that would work is someone may want to consider locking in different durations,” says Jason R. Fannon, certified financial planner and senior partner of Cornerstone Financial Services.
So you could have various options with different CD maturity dates. For example, six months, one year and so on. The CD ladder strategy can help “diversify against different scenarios that could occur regarding interest rates,” says Fannon.
Your needs
At every life stage, your financial needs change. Whether you should lock in a CD rate this July or not — and for how long — can depend on where you’re at in life.
“Older savers…they’re often prioritizing safety and the predictability of income. And so if they can lock in a CD rate now for the next six to 18 months and secure a piece of that with their cash bucket of what they need on a regular basis, that could be a great avenue for them,” says Ben Loughery, certified financial planner at Lock Wealth Management.
For younger savers who may need more flexibility, Loughery recommends either a short-term CD for a near-term goal or a high-yield savings account.
The bottom line
CDs can provide some stability and certainty for savers. During uncertain times, that can be a welcome benefit. To decide whether to lock in CD interest rates this July, consider your liquidity, short-term and long-term goals, and financial needs.
Based on that, you can choose a CD term maturity date that works for you or pursue an alternative like a high-yield savings account. If you’re stashing away a large sum for safekeeping, find an FDIC-insured institution and make sure you’re staying protected. “We want to be certain that you stay under the FDIC limit per institution of $250,000,” says Fannon. Additionally, read the fine print so you understand the early withdrawal penalties and the terms and conditions of your CD account.