The Federal Reserve has announced once again that its benchmark interest rate is staying put. This news isn’t the best for consumers in need of borrowing money, but it’s great news for today’s CD rates.
How the Fed’s actions impact borrowing
The Federal Reserve spent much of 2022 and 2023 hiking interest rates to help slow inflation. And because of the progress that’s been made, the Fed has been saying since the start of 2024 that it would be looking to cut interest rates.
Of course, the big question is, when?
The Fed met on July 30-31 to discuss this and other matters. And as has been the case in previous meetings this year, the Fed has opted to keep interest rates where they are rather than start to lower them. While progress has been made with regard to inflation, the Fed is clearly seeking further progress before it’s ready to take action.
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In June, the Consumer Price Index, which measures changes in the cost of consumer goods and services, was up 3% on an annual basis. But the Fed has long maintained that its target inflation rate is 2% in the long run. The Fed may be hoping to get closer to 2% before its first rate cut.
Meanwhile, the fact that the Fed is pausing interest rates isn’t the best news for consumers looking to borrow. Since the Fed’s benchmark interest rate is sitting at a 23-year high, it means consumers are looking at higher interest rates on everything from credit card balances to auto loans. A rate cut, on the other hand, could spell the beginning of relief for borrowers.
Why the Fed’s actions are great for CDs
A higher benchmark interest rate isn’t just bad news for consumers. It’s good news for people with money on hand who are looking to open CDs.
CDs have been paying APYs around 5.00% since the start of the year. But once the Fed starts cutting rates, CD rates are likely to follow suit.
The fact that the Fed has paused interest rates means savers can probably bank on scoring great CD rates for the remainder of summer. The Fed’s next meeting isn’t scheduled until September 17-18, so that’s its next scheduled opportunity to cut rates.
Should you open a CD this summer?
It’s a great time to capitalize on higher CD rates. But before you put money into a CD, make sure you’re all set with your emergency savings.
There can be costly penalties for cashing out a CD before it matures. You don’t want to put yourself in a situation where you tie money up in a CD only to need it a few months later for a home or car repair, or to cope during a period of unemployment.
But otherwise, you may want to consider a CD now, before rates start to fall. Better yet, open a CD ladder. This has you dividing your money into different CDs with staggered maturity dates — for example, a 3-month CD, 6-month CD, 9-month CD, and 12-month CD.
This not only reduces your chance of taking an early withdrawal penalty by giving you access to some of your money at regular intervals, but also gives you more flexibility in general.
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