Delaying deposit decisions? Consider the cost before waiting on the Fed

No one can predict the future direction of interest rates for certain, but some prescient economic prognosticators have been successful.

Case in point: Just prior to the Federal Reserve’s announcement on Jan. 29 that it maintained its benchmark federal funds rate at a range of 4.25-4.5 percent, nearly all professional investors polled by CME Group’s FedWatch tracker – 99.55 percent to be specific – predicted rates would remain steady at the late-January Federal Open Market Committee (FOMC) meeting. Only a sliver of analysis, the remaining 0.45-percent, said rates would drop 25 basis points, or a quarter of a percentage point. 

The way professional traders have positioned their investments is a strong indicator of future interest rates because they’re putting real money on the line. However, they also achieve returns by taking risks, and the biggest of those risks comes from misreading the direction of rates. 

In a vacuum, the Fed could raise its target rate, lower it or leave it unchanged. That was true at last week’s meeting and will be so for each upcoming FOMC meeting throughout the year. If you’re investing your savings, there’s one understandable worry: What if I put my money into a deposit account, such as a certificate of deposit (CD), but then rates go up? Would I have been better off to wait? Conversely, what if I keep all my savings in a savings account, and rates go down? 

These fears are well-founded, but there are ways to make an informed decision that helps earn greater returns on your discretionary savings. (If you’re considering how you can invest your emergency savings, read my two-part article on how to use your CD for your emergency fund.) 

Gauging a general direction for rates

No one can predict the future of interest rates, not even just before an FOMC meeting. Before the December 2024 meeting, many economists looked at the month-to-month inflation numbers and forecasted the Fed would not reduce its target rate. Then, the Fed did decrease it, though only by 25 basis points. 

For savers, the next FOMC is, of course, the least of their problems. During the term of a 12-month CD, for example, the Fed could change rates eight times. Given that fact, you should start with the two data points watched by Fed officials: price stability and maximum employment. Many professional investors track inflation and unemployment as key indicators for price stability and maximum employment. So, where are they today? 

Data suggests the economy still struggles with inflation. The personal consumption expenditures (PCE) index monitored by the Fed, which excludes more volatile prices from food and gas, has been trending downward on a month-to-month basis. It has reached current levels before, however, only to cycle higher again, even within the same quarter. 

The latest data on unemployment (seasonally adjusted) also shows it trended downward in December 2024. 

Might the Fed decide to raise rates to lower inflation soon? Inflation data suggests that rates may need to be raised during 2025. And, if unemployment continues its current trajectory, the Fed could raise rates and still satisfy its “maximum employment” mandate. 

Translation: Rising interest rates are possible during the term of a 12-month CD if opened today. But the same can be argued for declining rates during that CD’s term, given current inflation levels. So, how does this help you consider your deposit options? 

Making deposit choices at a time of uncertainty

I say again: No one can predict the future of interest rates. What I covered in the previous section outlines the possible scenarios for the near future. And today’s economic conditions differ starkly from those of June 2022, for example, when inflation skyrocketed to 9.1 percent and employment data was strong. Some form of rising rates was unavoidable in 2022; we just didn’t know how much. 

I used to get caught up in not knowing “how much.” What if I miss out on a 0.25-percentage point increase, or even a 0.5-percentage point increase, because I opened a CD too early? All the while, my savings were parked in an old savings account and I was earning “nothing” compared with current CD rates. 

That’s the real key: Knowing what’s plausible allows you to use simple math (or Bankrate’s simple savings calculator) to compare how much rate scenarios affect you. Take $20,000 invested for a year in any product, savings account, money market, or CD yielding 3 percent annual percentage yield (APY): You make $600 before taxes. If rates decline 25 basis points, you make $550; if 50 basis points (half of a percentage point), you make $500. Applying it for rising rates, you make $650 if rates rise 25 basis points and $700 for a 50-basis-point increase. 

Those 25 basis-point shifts make a difference, but the national average APY for a savings account is 0.55 percent, as of early February. If I’m earning that in my savings account – or even less – then I’m missing out on far more interest by “waiting to see what rates do.” Several top-yielding CDs today pay more than 4 percent APY. Even if I miss out on a rate increase from the Fed because I “locked-in” a 4 percent APY CD, I earn many times more than where I currently have my funds. 

A lesser-known tool

If you’re like me, you want to know: What about that scenario where I have my $20,000 in a CD and rates increase a lot? 

Suppose inflation returned with a vengeance, and the Fed increased interest rates by 200 basis points within three months of your opening a CD. Say banks start to offer CD specials at 6 percent APY, and you’re stuck in a CD at 4 percent APY. If you read my article on treating withdrawal penalties as options, then you chose a CD with a favorable penalty of 90 days’ worth of interest (or less). 

Your current one-year CD at 4 percent APY will earn you $800 over its 12-month term. If you withdraw the funds after three months, you’ll get about $20,000.67 back. If you then open a nine-month CD at 6 percent APY, you earn $893.41, and you can reach term in the same month as your old CD. 

So about that worry: What if I put my money into a deposit account, such as a CD, and rates go up?

• Remember, waiting to see what will happen with interest rates can cause more lost earnings than grabbing a reasonable rate now, especially for funds in a savings account you’ve had for a long time.
• A 4 percent APY on a CD may seem significantly less than 4.25 percent for the same term, but in dollarized earnings, it’s not worth the cost of inaction.
• Even when a CD may cause you to miss some interest, if you are going to miss out on meaningful amounts, it means you could exit your old CD and do better anyway. 

Bottom line

You don’t control interest rates as an investor; even those who look closely at inflation and employment data have mispredicted rate movements from the Fed. It’s far more common for people to miss out on earnings because they have savings parked in an old account than it is to miss a 0.25-percentage point increase from the Fed. And, if the Fed were to decrease rates at the next meeting, you’ll be happy you locked in a CD now. 

Navigating to better returns is about knowing what’s likely for interest rates and not letting the fear of missing out distract you from doing the math.