Toward the end of 2023, it became obvious that inflation was cooling and that interest rate hikes were no longer an appropriate move from the Federal Reserve. In fact, late last year, the Fed began signaling it would cut interest rates in 2024.
But we’ve reached the end of August, and so far, rate cuts haven’t happened. And that’s left a lot of consumers beyond frustrated. Since the Federal Reserve’s benchmark interest rate is sitting at a 23-year high, the cost of borrowing is elevated across the board. Consumers are eager to see interest rates fall because it should lead to less expensive mortgage, auto loan, and credit card costs.
Thankfully, consumers may not have to wait much longer for relief. Last week, Federal Reserve Chair Jerome Powell said, “The time has come for policy to adjust.” And it doesn’t take a whole lot of reading between the lines to ascertain that the Fed is most likely planning to cut interest rates during its upcoming Sept. 17-18 meeting.
That’s good news for people who have been waiting for rates to fall before borrowing money. But it’s not the best news for savers.
Savers should act quickly to benefit from higher rates
Although the Fed’s interest rate hikes have negatively affected consumers looking to borrow money, they’ve benefited people with money in the bank. Those with extra cash have been able to take advantage of record-high savings account and CD rates.
But with the Fed’s first planned rate cut being right around the corner, the days of 5% CD rates could soon be behind us. If you have a pile of cash sitting in a savings account, you may want to move some of it into a CD before rates start to fall.
To be clear, you shouldn’t take money out of savings that’s earmarked for emergency expenses. Your emergency fund should always sit in savings where it’s easily accessible, because tapping a CD before its maturity date typically results in a costly early withdrawal penalty.
But if you have money in savings beyond what you need for your emergency fund, then now’s a great time to open a CD. If you wait much longer, you may find that you’ll have to settle for a lower rate.
Of course, one thing you should know is that just as the Fed raised interest rates gradually throughout 2022 and 2023, so too are rate cuts likely to be gradual. CD rates shouldn’t plummet overnight, so there’s no need to panic if you need more time to open one.
The point, rather, is that if you have the cash on hand, you might as well lock in a CD APY at 5.00% now, as opposed to waiting a month or two and possibly only getting 4.50% or less.
A CD ladder might be your best bet
If you’re eager to open a CD before interest rates fall, you may be inclined to choose a 12-month term. In many cases, terms of 12-months and fewer are where you’ll find the best CD rates today. But an even better bet could be to set up a CD ladder.
With a CD ladder, instead of putting all of your money into a single CD, you split it into several CDs with different maturity dates. The goal is to free up some of your money at staggered intervals so you have better access to your cash. Plus, you can use a CD ladder to lock in today’s strong interest rates for a longer period of time.
Let’s say you have $5,000 to put into a CD. Instead of opening a single CD, you could split that sum into four $1,250 deposits and open CDs with these terms:
- Six months
- 12 months
- 18 months
- 24 months
This way, you get access to some of your cash every six months. And also, the 18- and 24-month CDs guarantee you a higher return on your money for a lengthier period of time.
You may also decide that you’d rather have shorter gaps between when your CDs mature. In that case, you could go with four CDs that mature in:
- Three months
- Six months
- Nine months
- 12 month
There are different setups you can play around with, depending on your financial situation and comfort zone. Either way, if you have the money to put into a CD, then you should act right now. Waiting isn’t terrible if it’s a necessary thing to do. But if it’s not, then you might as well score the best CD rate you can before cuts start.
