Here’s Why You Should Put Money in a CD in January 2024

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CD yields are at their highest level in years. Here’s why you might want to lock in a rate now. 

Certificates of deposit, or CD accounts, are paying some of their highest yields in years. At the time of this writing, it’s rather easy to find a 1-year CD with a yield of more than 5%, and 5-year CDs with yields greater than 4% are readily available.

While there’s certainly a chance that CD yields could stay elevated or even get higher, that doesn’t appear to be the most likely scenario. With that in mind, here’s what experts expect interest rates to do in 2024, what it could mean for CD interest rates, and why you might want to lock in high CD yields while you still have the chance.

Benchmark interest rates are high — but will they stay that way?

Since the start of 2022, the benchmark federal funds rate has increased from virtually zero to its current range of 5.25% to 5.50%. (Note: When you hear about the Federal Reserve “raising rates,” it usually refers to the federal funds rate.)

The Federal Reserve has raised rates sharply in an effort to combat inflation, which soared to a 40-year high in 2022.

Along with its interest rate decisions, the Federal Reserve releases its members’ economic projections four times a year. In the most recent version, the policymakers are expecting to make three quarter-point rate cuts in 2024 (so, cutting rates by a total of 0.75%).

However, many experts anticipate even sharper rate cuts as inflation cools off. According to the CME FedWatch tool (which essentially tells us what investors expect), the median expectation is for a year-end federal funds rate of 3.50% to 3.75%, which would imply seven quarter-point rate cuts.

What does it mean for CD yields?

One important thing to know is that CD yields don’t have a direct relationship with benchmark rates, such as the federal funds rate. In other words, if the Fed decides to reduce the federal funds rate by 1 percentage point, it wouldn’t automatically make online banks reduce their CD yields by the same amount. However, they do typically move in the same direction, and we’ve seen that over the past couple of years.

In short, if the Fed were to start cutting rates, it’s extremely likely that CD yields would start to decline soon after.

There’s no guarantee, but all signs point toward lower CD yields in 2024

Of course, just because experts expect benchmark interest rates to fall in 2024 doesn’t mean they actually will. After all, at the end of 2021, Federal Reserve members were calling for the federal funds rate to rise to about 1.6% by the end of 2023. It’s currently set at a range of 5.25%-5.50%. Of course, at the time, experts were still using words like “transitory” to talk about the uptick in inflation.

The point is that all these projections are based on the information we have available now. They aren’t guaranteed to happen. Recent data shows that inflation is quickly approaching the Fed’s target level. But if inflation were to unexpectedly spike higher once again, we could certainly see the Fed pump the brakes on any rate cuts, or even move them higher.

Having said that, the most likely direction for interest rates in 2024 is down. If you have cash in the bank that you’re thinking about putting in a CD, it could be a smart idea to do it and lock yourself in a good CD rate before any rate cuts happen.

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