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Published: Jan 08, 2024 7 min read
Photo-illustration of people climbing a mountain made of money, with a graph in the background.
Olive Burd / Money; Getty Images

The Federal Reserve's aggressive fight against inflation appears to be winding down, and that will ultimately affect the interest you earn on your deposit accounts like certificates of deposit (CDs), high-yield savings accounts and money market accounts.

CDs, in particular, have grown in popularity lately as a safe place to park your savings and earn a handsome APY. In recent months, some banks and credit unions have offered promotional CD rates as high as 6% or 7%, but they often come with strict eligibility criteria. The best CD rates that are widely available are still above 5% — rates not seen in decades.

How long will these rates last? And could they go any higher in 2024? Here’s what you can expect.

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CD rates in 2024

Historically speaking, the CD rates available now — anywhere between 4% and 6% — are not all that high, experts say.

“In reality, we’re somewhat back to a level of normalcy today,” says Lawrence Sprung, founder and wealth advisor at Mitlin Financial. “I would argue that rates over the last 15 to 17 years were extraordinarily low — and that was the anomaly.”

Randy Watsek, a financial advisor at Raymond James, echoed that sentiment, noting that interest rates since the Great Recession have been abnormally low. For context, he says, over the last 100 years or so, the average long-term interest rate has been around 5%.

Still, they say, don’t get used to today’s high-ish APYs on CDs and savings accounts.

Analysts and economists largely expect the Fed to freeze rates for the near future and then start cutting them later this year. And when that happens, APYs on CDs and other deposit accounts will fall, too.

What’s the Fed got to do with it?

The Federal Reserve doesn’t control what APY your bank gives you, at least not directly. What the Fed does directly control is what’s called the federal funds rate.

This is a rate range (currently 5.25% to 5.5%) that financial institutions are charged to borrow money from each other or from the Fed itself, Sprung says. Then commercial banks use this as a benchmark to set their own interest rates on all kinds of consumer products, like loans, credit cards and deposit accounts.

To rein in soaring inflation, the Fed has been hiking rates at the fastest clip in several decades. But its interest-raising spree is coming to an end.

“Wall Street is expecting inflation will continue to come down and because of that, the Federal Reserve won’t need to be so aggressive,” Watsek says. “They expect the Fed — after maybe holding it steady now — to start cutting interest rates later.”

When CD rates could fall

Because CD rates rise and fall in tandem with the federal funds rate set by the Fed, we can get a broad sense of when rates may start noticeably changing.

The Fed meets eight times a year to decide whether to raise, lower or keep interest rates steady. Its next meeting is January 31.

According to the CME FedWatch Tool, investors overwhelmingly expect the Fed to keep interest rates the same in January. The earliest the Fed is predicted to begin cutting rates is in March, at the second meeting of the year, and by an estimated 0.25 percentage points. (Both Watsek and Sprung say they believe the Fed’s first cut won’t come until later.)

If you’re trying to read the tea leaves: CD rates, on the whole, are probably going to stay about the same in the immediate future. While rates can fluctuate day-to-day, it will likely be at least a couple months before they begin to fall in unison. Experts largely do not expect them to noticeably increase.

If or when the Fed decides to cut rates this year, Sprung says you can expect CD rates to quickly follow suit — in about seven to 10 days.

How far rates will ultimately drop in 2024 is unclear. Fed officials have signaled at least three rate cuts in 2024, with some analysts expecting upwards of six cuts. According to FedWatch, most investors currently expect the year to close out with interest rates in the 3.5% to 4.25% range.

What's the best time to buy a CD?

Before investing in a CD, it's important to figure out whether the savings instrument makes sense for your situation. While CDs have attractive rates right now, remember that they tie up your cash for specific periods of time — typically three months to five years.

Withdrawing your money before the CD term ends will likely result in an early withdrawal penalty of several months' worth of interest. Because of these stipulations, it's generally advised that you build up an emergency fund in an easily accessible account — like a savings account — before investing in CDs.

Once you're ready to invest in a CD, you should ideally try to lock in your interest rate when it's at its peak. This may take some strategizing and guesswork. Though no one can predict exactly where rates are going, most financial experts say now is a good time to lock in your CD rate, given that the Fed is widely expecting to cut rates several times later this year.

Currently, short-term CD rates (generally one year or less) are trending higher, in the 5% range. But if you're unsure of your time horizon, Sprung says you may want to consider CD laddering, a strategy where you mix up your CD term lengths (of, say, three months, six months, nine months and two years).

"So you'll have rates locked in," Sprung says. "You may get a blended rate that may not be the best rate available, but you'll get close to it and also have some liquidity and availability to that money."

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