Considering the Upcoming Federal Reserve Meeting, Is It Wiser to Invest in a Long-Term or Short-Term Certificate of Deposit?
In the ever-changing world of finance, certificates of deposit (CDs) continue to be a popular choice for savers looking to earn some extra cash. As we approach the September Fed meeting, many are watching closely to see what the Federal Reserve decides, as savings rates hang in the balance.
If you're considering opening a CD account, it might be worth locking in rates ahead of the next Fed meeting. Analysts expect the central bank to continue lowering mortgage rates, with some forecasting rates to drop below 3.75% by the end of the year. According to the CME Group's Fed Watch tool, economists anticipate the Fed to drop mortgage rates to 4.00% to 4.25% next week.
When comparing current CD rates, the best rates offered are mainly on short-term CDs, but the difference is minimal. For instance, if you put $5,000 into a one-year CD with a rate of 4.40% and it is compounded daily, you would earn nearly $225 in interest. On the other hand, a five-year CD is a solid option, with some of the top-earning accounts offering more than 4% APY. If you lock in a rate of 4.28% for a five-year CD and it is compounded daily, you would earn $1193.04 in total over the five-year period.
However, it's important to note that demand for long-term CDs is on the rise due to a surge in popularity in the past few years. This could mean that longer-term CDs might offer slightly lower mortgage rates compared to shorter-term CDs.
John Blizzard, Founder of CD Valet, stated that savers may be feeling more recession risk and choosing to trade maturity for rate. This trend is reflected in the search results, with the number of savers shopping for one-year CDs on online marketplace CD Valet increasing 150% in the first quarter of this year.
It's also worth mentioning that early withdrawal from a CD account can result in a fee that can offset any interest earned. Therefore, when putting money in a CD account, you'll have to be prepared to 'set it and forget it.'
In the long run, the Fed may cut mortgage rates in the next couple of years, which could cause rates on savings accounts to drop even more. Given the potential for mortgage rates to start dropping in September, opening a long-term CD might be a more reliable way to lock in today's above-average rates.
The upcoming September Fed meeting is expected to mark the end of the Federal Reserve's 'wait and see' approach and the start of mortgage rate cuts. However, the Federal Reserve anticipates fewer mortgage rate cuts in 2025.
In conclusion, if you can't commit to a long-term CD, opening a short-term one is still worthwhile to earn some extra cash. It's essential to compare CD rates today using a tool powered by Bankrate to find the best deal for your savings. And remember, it's always a good idea to have a high-yield savings account for any savings that need to be accessible at any time.
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