Considering Longer-Term CDs? Now Might Be the Perfect Time

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The Federal Reserve may drop interest rates soon. Find out why buying now might be a good idea for some investors. [[{“value”:”

In March 2022, the Federal Reserve raised interest rates for the first time since 2018 in an effort to control rising inflation, which was taking its toll on the economy. This also meant that mortgage interest rates went up, but so did the interest rates on certificates of deposit (CDs) and high-yield savings accounts.

But rates may finally be dropping soon. After the Federal Open Market Committee meeting in July of this year, many folks expected the Fed to lower interest rates. While that didn’t happen, Federal Reserve Chair Jerome Powell did say he thinks the time to lower interest rates is “approaching.”

Here’s why lower interest rates make now an excellent time to consider longer-term CDs – but not super long term.

Interest rates are currently high, but may drop soon

Let’s look at what CDs currently earn and consider whether now might be a good time to invest.

A 5-year CD from Discover® Bank currently earns you 3.60% in interest. At LendingClub, a 5-year CD earns 4.00% interest, while Ally is offering 3.90% interest rates. This is not super high, but let’s look at 18-month rates: Ally offers 4.25% interest for an 18-month CD, while Discover® Bank offers 4.25%, and LendingClub offers 5.00% interest. That’s decent compared to the 0.75% average for a 1-year CD in 2019.

The Fed has already indicated it is likely to lower interest rates soon, which means CD rates will likely follow.

Note: 5-year CD rates are lower than shorter-term rates, likely because many people expect interest rates to fall in the next few years. This is known as a “yield curve inversion,’ which happens when longer-term rates are lower than short-term, and it often occurs before shifts in economic conditions.

Is now the time to buy longer-term CDs?

Now is a good time to consider longer-term CDs. But the inverted yield curve means buying 5-year CDs isn’t the smartest move. Instead, look at 12- and 18-month CDs and consider locking in that higher interest rate before the Fed lowers interest rates.

Whether it lowers rates at its next meeting in September or later in the year is yet to be seen. There’s also no way to predict how much the rate may go down, so make sure to consider all your options and your financial goals.

CDs: The good, the bad, and the ugly

CDs can be a hot-button topic. Some people love them; some people hate them. That’s because there are quite a few pros and cons. For starters, CDs are low risk — you lend the bank your money, and it promises to give it back with interest in however many months you agree to.

For example, if you deposit $10,000 in a 12-month CD at 4% interest, you’ll make around $400 in one year. Depending on compounding frequency, the return might be slightly higher. However, if you need to pull that money out before the 12 months are up, you’ll be penalized.

CDs also earn a lower rate than investing in the stock market. Let’s say instead of putting that $10,000 in a CD, you invested it. The average stock market return between 2012 and 2021 was 14.8%, which means that $10,000 could grow to $11,480.

Keep in mind that the stock market can be volatile, and past returns don’t indicate future performance. Instead of picking one or the other, it’s a good practice to balance your investments with high-risk and low-risk investments — meaning both CDs and stocks.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Ally is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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