CD Rate Prediction: When to Lock In Long-Term, According to Experts

Interest rates on Certificates of Deposits (CDs) are steadily rising, creating renewed interest among depositors.

Interest rates have risen sharply from pandemic-era lows in the past few months in an effort to bring down record inflation. The Federal Reserve announced its fourth rate hike of the year. June saw the biggest interest rate hike in decades (2.25% to 2.50% target). Further rate hikes are possible in the near future.

Correspondingly, CD rates currently range from 1.90% to 2.50% for a one-year CD.

If savings are a priority today, higher interest rates mean better returns on savings, including CDs. We also asked the expert what to expect from his CD rate next, and recommendations for savers today, with more Fed rate hikes expected.

What to expect from CD rates through 2022

After the Fed’s latest rate hike in July, experts say more rate hikes are likely over the next few months.

“We will probably see [rates] Ayesha Selden, Certified Financial Planner and Franchise Owner of Ameriprise Financial Services Inc. in Philadelphia, said: “It benefits us on the CD and savings account side.” But she also points to the downside for borrowers.

Banks may continue to increase CD rates (which are based on federal funds rates, not directly related to them) as a result of higher federal rates.

Sweta Bhargav, Certified Financial Planner and Principal Financial Advisor at Adviso Wealth, a financial planning and investment firm in Philadelphia, said: “We’ve seen a big difference [in interest rates] From January till now

But just because interest rates are projected to rise doesn’t mean it will stay that way for long, says Mantas Tautkas, a certified financial planner at MT Financial Planning in Lake Barrington, Illinois. Ultimately, the Fed’s intent in raising rates is to keep inflation down. “Ultimately, they will succeed in keeping inflation under control,” he says Tautkus. “In doing so, they will likely lower interest rates and re-stimulate growth.”

Ultimately, savers need to prepare for a changing tide. If inflation plateaus or falls, interest rates may start to shift in the other direction.

“If you have already reached a certain point, [the Fed] I feel like I need to pause, but things could level off a bit,” said Corey Moore, certified financial planner and founder of Moore Financial Planning.

Things to know before opening a CD now

In an economic environment where interest rates are rising rapidly, securing long-term CD rates that are now competitive could mean missing out on better APYs as interest rates rise.

“Normally, I don’t think we’ve gone past two years, regardless of market conditions,” Tautkus says.

Still, choosing the longest CD term that fits your goals will help you maximize your interest income. For example, if you know you won’t need cash for a year, consider a 1-year CD to guarantee a higher return than a shorter term, lower interest rate CD. For long-term goals, the CD ladder helps maximize interest while maintaining liquidity.

“Flexibility is one of the great things about the CD ladder. You can think about what you want to do with it when it matures, and even reinvest in it,” says Bhargav.

However, even with the CD ladder, experts now recommend keeping the CD length to less than 2-3 years. As your CD ladder matures, you can reassess your financial goals and current interest rate environment and decide whether to invest your money, direct it toward new goals, or create another CD ladder depending on interest rates, says Moore.

Other Savings Options to Consider

CD rates are rising, but there are better ways to invest your money for better returns, says Nia Gillett, paraplanner at financial planning firm Gen Y Planning. Depending on your financial goals, these options may offer better returns or flexibility than CDs, even if interest rates rise.

eyebones

Currently, Series I Savings Bonds have an APY of 9.62%, much higher than CDs, and are backed by the U.S. government, Gillette said.

But it’s important to remember. I Bond rates track inflation and Fed rate hikes are designed to reduce today’s runaway inflation. In other words, as federal interest rates rise, I-Bond floating rates may become less attractive.

Note that I Bonds must be held for one year and you can only purchase an I Bond for up to $10,000 each year per Social Security number. The holding period is 30 years, and if you cancel within 5 years after opening, you will have to pay interest for 3 months.

I Bonds floating interest rates change every 6 months. “It’s always possible that I Bonds will pay less interest than CDs at some point,” he says Gillett. “If that happens, you can always switch and cash out your I-bond and put it on your CD.”

High yield savings and money market accounts

In terms of interest rates, CDs now sit between IBonds, more flexible money market accounts and higher-yielding savings accounts, Moore said. At the current rate, you can earn up to 2% APY for her on your savings.

These accounts have a floating interest rate that rises with the CD interest rate, but the balance is not locked into the account for a set period of time. For short-term savings and emergency funds, these are the most liquid account options, allowing you to earn competitive interest rates on your balance.

Conclusion

We recommend weighing the pros and cons of each savings option based on your financial goals before deciding on a CD based on current rates. CDs can provide returns over time, but you may get more profit from accounts with higher liquidity or choose investments with higher potential interest rates. Think about how today’s environment could change in a few months or a year as interest rates rise.

It’s also worth re-evaluating your plan over time to make sure it works. [savings] categories,” says Tautkus. He recommends evaluating your savings strategy each year and comparing rates to see if you can get a better return.