CD rates remain near their highest levels since the mid-2000s, and you can find a 1-year CD from a reputable financial institution with a yield of about 5% as of mid-August.
This is great for people who lock in their rates now, but it’s likely that these high rates aren’t going to last much longer. In fact, the Federal Reserve is widely expected to start cutting benchmark interest rates at the conclusion of its September meeting. Not only that, but the rate cuts are expected to continue well into 2025, at a minimum.
With that in mind, here are the latest interest rate expectations, what they would likely mean for CD rates, and why you might want to lock in a high-yield CD while you can.
Where are interest rates heading?
The policy-making members of the Federal Reserve issue their own projections four times a year, and in the latest (June) version, the median expectation was for a total of five quarter-percentage point rate cuts by the end of 2025, and another four in 2026. However, a lot has happened since June, in terms of economic data and general expectations of rate cuts.
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The CME FedWatch Tool is a good indicator of what the financial markets expect and is updated continuously. Here’s what it is telling us now:
- Not only are markets pricing in a virtual certainty of an interest rate cut in September, but there’s roughly a 50/50 probability that the Fed will do a double rate cut (Note: A Federal Reserve rate cut is generally considered to be a quarter percentage point.)
- By the end of 2024, the median expectation is for a total of 1 percentage point of rate cuts.
- By the September 2025 meeting (the last one available as of this writing), the median expectation is for 2 full percentage points of cuts. And there’s a roughly 50/50 chance priced in that there will be even more.
What would these rate cuts mean for CD rates?
I want to emphasize one important point before we go on. There is no direct relationship between benchmark interest rates like the federal funds rate and CD rates. In other words, if the Fed cuts rates by 0.50%, there’s nothing that makes CD yields fall by the same amount — or at all. CD rates are determined by the financial institutions that offer them.
Having said that, benchmark interest rates and CD rates tend to move in the same direction. So, the short answer is that I expect CD rates to start falling later this year. But to be more thorough, I would divide them into two groups.
Shorter-term CDs (think 18 months or less) tend to be the most reactive to the Fed’s rate moves. It wasn’t long ago when it was tough to find a 1-year CD that had a 1% yield, and it’s because the Fed held rates at near-zero levels. So, if the Fed cuts rates as expected, I’d expect short-term CD rates to take the biggest hit.
Longer-term CDs (24 months or longer) are more dependent on expectations of future interest rates than the current rate environment. This is why 5-year CD yields are significantly lower than 1-year CDs right now. If the Fed cuts rates, I would certainly expect longer-term CD rates to trend lower, but not as sharply as their short-term counterparts.
Act now or plan on lower rates
The bottom line is that CD rates are likely to gradually decline for the rest of 2024 and through 2025 at a minimum, and that’s especially true when it comes to shorter-term CDs. Putting money into CDs isn’t the right move for everyone, but if you’re sitting on some cash in a savings account that you aren’t going to need anytime soon, it might be a good idea to check out some of the best CD rates — while they’re still available.
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