Even after three rate cuts, it’s still a good time for long-term CDs

The Federal Reserve officially cut its federal funds rate for the third consecutive time, marking the end of its restrictive monetary policy, which the central bank took up to temper inflation.

Interest rates were cut by another quarter-percentage point, or 25 basis points, at the Federal Reserve’s rate-setting meeting on Dec. 18, lowering the target range for the Fed’s key benchmark interest rate to 4.25-4.5 percent. 

With these rate changes, it’s expected that banks may lower yields on deposit accounts, including certificates of deposit (CDs) and savings accounts. And that’s why opening a CD with a term of one year or greater may still be advantageous right now.

Even though you may have missed out on the absolute highest yields during the Fed’s 11 rate increases starting in 2022, annual percentage yields (APYs) that are outpacing inflation are readily available at top-yielding banks.

Unlike a savings account, opening a CD typically locks in the advertised yield for the duration of the account’s term. Thus, locking in a CD means you can continue earning a high yield far into the future, even if APYs decrease.

8 reasons why now might be a good time to consider a longer-term CD

1. You have long-term money in a savings account

A Bankrate survey from March found that only 22 percent of Americans with short-term savings have a savings account with a yield of at least 4 percent APY. People with money in those high-yield accounts have likely seen their yield increase dramatically since around March 2022, when the Fed started raising interest rates.

But if some of that is longer-term money — and rates do decrease in the future — you might be glad you opened a longer-term CD now.

2. You have funds you won’t need for a period of time

Having your emergency fund and other savings in a high-yield savings account is a good first step. But longer-term money might work better in a CD if you won’t need the money during the CD’s term. A CD can potentially help you earn a higher APY than a savings account, which generally has a variable APY. But your regular CD has a fixed APY for the term of the CD.

Make sure you won’t need these funds during your CD term. Otherwise, you could incur an early withdrawal penalty. You could consider a no-penalty CD for funds that you think you might need during a CD’s term.

3. CDs typically offer a guaranteed return

There are few guarantees in life. But money in a CD — as long as it’s within the FDIC’s limits and following the FDIC’s rules — is protected from a bank failure and will earn a guaranteed APY, as long as you keep the money in the CD for the entire term and the CD isn’t callable.

“If you’ve had your eye on a CD, and especially one of the multi-year maturities, this is the time to lock in — they won’t get better by waiting,” says Greg McBride, CFA, Bankrate chief financial analyst.

4. A yield above 3 percent should outpace long-term inflation

During normal times, a 2 or 3 percent yield would likely be close to keeping up with inflation. And 3 percent APY can increase your chances of potentially preserving purchasing power. Even as yields start to come down, you can still find longer-term CDs close to 4 percent APY. 

5. Long-term CD yields are good options if you think rates will keep going down

You shouldn’t try to time the market. And you shouldn’t try to find the absolute perfect time to deposit money into a new CD.

But one thing is clear: None of us can with 100 percent certainty predict the future path of rates. Just look at the surprise stemming from the pandemic — where rates dropped to near-zero levels very quickly — as just one example.

You could consider a bump-up CD if you don’t want to miss out on the potential for CD APYs increasing more.

6. A CD ladder could be beneficial in this environment

A CD ladder is a great way to spread CD maturities over time with different terms of CDs. Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs.

But these days, you’re likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.

7. Earn a guaranteed return without market risk

Securing a fixed APY that isn’t callable during your CD term and getting Federal Deposit Insurance Corp. (FDIC) insurance coverage are two ways that a CD offers you guarantees. And these days, you can get a competitive return with a CD, too.

You can still earn a yield of 4 percent APY on a 5-year CD. Of course, you could earn much more in the stock market, but you could also potentially lose all of your money invested in the market also. So for safe money that you can’t afford to lose and don’t need during the CD term, a CD can make sense. With FDIC insurance, always make sure you are within the FDIC limits and following the FDIC’s rules.

8. You’re retired, or about to retire

People who are already retired – or retiring in the near future – may want to consider a CD and lock in a rate now. That way, they can potentially be ahead of long-term inflation. There’s no guarantee that inflation will stay in the two percent range; it could increase in the future.

Bottom line

A long-term CD can be a good fit for money that you won’t need during the CD’s term. Locking in a longer-term CD now could help you preserve purchasing power if rates drop more or substantially in the future. But depending on your risk tolerance and time horizon, there are other types of investments that might align better with your financial goals.