Should You Buy CDs Before Rates Drop?

There’s a reason 5% CD rates may soon become a thing of the past.

In 2022 and 2023, the Federal Reserve raised the federal funds rate 11 times in an effort to slow the pace of inflation. But since the start of 2024, inflation has calmed down, so much so that the Fed had talked about cutting its benchmark interest rate since the start of the year.

On Sept. 18, it finally made good on that pledge by lowering the federal funds rate by half a percentage point. And September’s rate cut is likely to be the first of many, provided inflation continues to trend in a downward direction.

While a lot of people may be happy about interest rate cuts, you should know that they’re a bit of a mixed bag. Sure, rate cuts could lead to cheaper auto loans, mortgages, and home equity loans. But they’re also going to lead to lower interest rates for savings accounts and CDs.

If you’re interested in opening a CD, you should know that rates are still pretty strong. But they have the potential to keep dropping in the coming months. So if you’re certain a CD is right for you, the time to act is now. And if you’re not sure a CD is your best bet, there’s a simple question you can ask yourself to figure things out.

Why you shouldn’t wait to open a CD

Before you panic about the Fed lowering interest rates and the impact on your savings, you should know that just as the central bank raised rates gradually, so too is it likely to lower rates gradually. That said, this week’s interest rate cut was pretty substantial. The Fed could’ve lowered its benchmark interest rate by a quarter of a point, but it opted for a larger half-point cut instead.

This isn’t to say that the Fed’s next cut, or the one after that, will be as large. But even if not, you should expect CD rates to drop continuously as the Fed reverses its rate hikes from 2022 and 2023. So if you have money to put into a CD, you might as well do so immediately. The longer you wait, the lower the rate you’re likely to end up with.

How to know if a CD is right for you

It’s not a given that a CD is the right home for your money. First, if you have cash that’s earmarked for emergencies, it should not go into a CD, but rather, stay in a savings account.

CDs commonly impose penalties for early withdrawals. But you might need to take an early withdrawal if you put your emergency fund into a CD and a home or car repair pops up, or if you lose your job and need money to pay your bills while you look for work.

If you’re all set with emergency savings and have cash on top of that to put into a CD, then you’re less likely to face an early withdrawal penalty. But even in that situation, you’ll want to ask yourself one key question: Can I part with this money for 10 years or more?

If the answer is yes, then you may want to invest your money in a brokerage account rather than keep it in a CD. You may be able to lock in a 5% rate for a bit longer on a short-term CD. Or if you can’t get 5%, you might snag a 4.50% APY, which is still a pretty good rate.

But over the past 50 years, the stock market’s average annual return has been 10%. So if you’re looking at a longer time frame, investing your money could grow it at a faster pace than what a CD might allow for.

To be clear, though, you generally want to give yourself a good 10 years or longer if you’re going to invest in stocks and other assets whose value can change from week to week. That 10% average stock market return accounts for years when the market did great, but also, years when it tanked.

You need time to ride out downturns, so if you’re not sure you have a longer window, you may want to stick to a CD, where you may only be committing to a 12- or 24-month term.

Shop around if you decide to open a CD

You might feel like the pressure is on to open a CD before rates fall further. If you decide that’s the best course of action, do your research. Spend a little time comparing CD rates to lock in the best deal.

Today’s rates are not going to stick around for much longer. So if you’re going to commit to a CD, you might as well set yourself up to earn the maximum amount of interest from it.