The Fed Just Paused Interest Rates Again. Here's Why I Would Run to Open a CD
It's a good time to open a CD. Read on to see why.
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The Federal Reserve has been battling inflation ever since it started surging in 2021. And since March of 2022, the central bank has raised interest rates 11 times. But at its Jan. 30–31 meeting, the Fed opted to hold interest rates steady due to slowing inflation. And that marks the fourth consecutive meeting in which the Fed is keeping rates status quo.
In some regards, that's not the best news for consumers, as many were no doubt hoping to see a reduction in the Fed's benchmark interest rate. Rate cuts have the potential to drive the cost of borrowing down, which is what consumers looking for loans want.
On the other hand, the fact that rate cuts aren't happening yet is good news for consumers with money in the bank. Once the Fed lowers its benchmark interest rate, savings accounts and certificates of deposit (CDs) are likely to start paying less.
Those rate cuts, however, are likely to arrive at some point in 2024. That's why I'm looking to open a CD in the coming weeks. And if you're eager to score a higher interest rate on your money, I suggest you do the same.
Strike while rates are hot
The Fed has long maintained that it prefers to target 2% inflation in the long run. The central bank feels this target is conducive to economic growth and stability.
The most recent Consumer Price Index (an index measuring changes in the cost of common goods and services) showed inflation up 3.4% on an annual basis. That's a ways off from 2%, but not so far off. As such, it's not surprising that the Fed opted not to raise interest rates at its January meeting.
But because this is the Fed's fourth consecutive rate hike pause, at this point, it's pretty clear that the central bank is done raising rates for now. As such, the rates CDs are paying today may be the best ones consumers will get to lock in all year. So if you have money you can afford to part with for a period of time, now's a good time to consider a CD.
I'm looking long-term
If you're interested in opening a CD, your best bet is to check out the rates different banks are offering and see what works best for you. You should know, however, that in most cases, right now, you'll get a better rate on a shorter-term CD than a longer-term one. And the reason is that banks are aware of potential Fed rate cuts ahead, so they're likely to offer better rates on shorter-term products.
There's nothing wrong with opening a six- or 12-month CD if that's what works best for you. But I intend to focus on longer-term CDs, even if that means having to settle for a lower interest rate.
Once the Fed starts moving forward with rate cuts, CD rates could fall a lot. And I'm not sure how many more opportunities I'll have to lock in a 5-year CD at a rate that's as attractive as my options are today. So even though I'm a little nervous to tie up some money for five years, I think it's a financially sound thing for me to do.
To be clear, a big reason I'm comfortable doing this is that I have a completely separate emergency fund. So any money I put into a 5-year CD is cash I don't have a particular use for. They're not the funds I'd need to tackle a home repair or cover bills in the event of job loss.
If you're considering opening any type of CD, make sure you're not tying up your emergency fund in that account. Otherwise, I think now's a really good time to lock in a CD -- before rates start to become less and less appealing.
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