Should You Open a CD Before the Fed Cuts Rates Again?

The Federal Reserve recently cut the federal funds rate for the first time since early 2020, and we’re already seeing the effects on CD rates. While CD rates offered by the best banks are still high relative to where they were a couple of years ago, there has been a noticeable pullback following the Fed’s announcement.

However, while the Fed’s 50-basis-point (0.50%) rate cut was rather aggressive, it’s important to know that it is widely expected to be the first in a series. In fact, the policy-making members of the Federal Reserve themselves are projecting interest rates to drop much further over the next couple of years.

With that in mind, is it still a good idea to open a CD now, before the Fed cuts rates again? Here’s what you need to know.

Rate cuts are expected to continue

The Fed’s 50-basis-point rate cut took many people by surprise. Experts were torn between whether we’d see that, or a rate cut half the size. But it’s important to point out that this is still expected to be the first rate cut in a multi-year cycle.

Along with its rate cut decision, the Fed also released its Summary of Economic Projections, a document that is updated four times per year. In this document, the Federal Reserve Board members and Federal Reserve Bank presidents share their consensus on the directions of things like economic growth, unemployment, inflation, and of course, future interest rate movements.

In the latest edition, here is what the Fed is expecting for interest rates:

• Another 50 basis points (0.50%) in rate cuts by the end of 2024.
• Yet another 100 basis points (1%) in rate cuts during 2025, for a total of 2 full percentage points including the rate cut already made.
• Another 50 basis points (0.50%) in 2026, for a total of 2.5 percentage points of rate cuts.

Will CD rates plunge? It depends

When it comes to the effects on CD rates, there are effectively two different “groups” that can be considered separately.

First is shorter-term CDs (those maturing in 18 months or less). These tend to be highly reactive to the Fed’s moves. In fact, one of our top banks was offering a 9-month CD with a 5.10% APY prior to the Fed’s rate cut and that bank is offering a 4.40% APY on the exact same product now.

On the other hand, longer-term CDs are somewhat less reactive in general. Their rates tend to be more sensitive to expectations of future interest rates, and not necessarily the short-term moves. In other words, if expectations for what interest rates will do over the next few years change significantly, it would likely have a big impact on 5-year CD rates.

Top 5-year CDs were offering APYs in the 3.50%-4.00% ballpark prior to the Fed’s rate cut, and rates in this range are still readily available now. That’s because expectations for rates haven’t changed much.

Should you open a CD now before the Fed cuts rates again?

The short answer is “it depends.” If you want a short-term CD or want to create a CD ladder and you have the cash in your savings account to do it now, there’s a good case to be made that you shouldn’t wait. On the other hand, if your money is tied up or you’re considering a longer-term CD, there’s not a big sense of urgency right now.

Whatever you decide to do, you have a little time. The next Fed meeting is in early November (when another rate cut is widely expected).