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The U.S. economy is stabilizing after years of turbulence. Inflation has cooled from its 9.1% peak in 2022 to 2.5% in August 2024, though it’s still above the Federal Reserve’s 2% target. Interest rates remain high, with the federal funds rate frozen between 5.25% and 5.50%.
These high rates have been a boon for savers, especially those using certificates of deposit (CDs). Many banks are offering CD rates up to 4% to 5%, a significant jump from the 0.19% average in May 2021. But as the Fed considers potential rate cuts, savers need new strategies.
We consulted three financial experts to get their best tips for getting the most out of CDs in the coming months. They shed light on smart CD moves, explain why CDs are still worthwhile and discuss the benefits of opening one now — even with possible rate drops ahead.
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How to make CDs valuable as interest rates drop
Even with the Fed set to start cutting rates, CDs can still be a powerful tool in your savings arsenal. The key is knowing how to use them well in a changing market.
John F. Pace, certified public accountant at Pace & Associates, CPAs, puts today’s rates in perspective: “In the 1980s, we saw CD rates climb over 10% at times, allowing clients to maximize returns in a high-rate environment.” He explains that while rates are much lower than that today, they’re still favorable compared to recent history.
Expert strategies for CD investments
To help you make smart CD moves, we’ve gathered advice from two financial professionals — Pace of Pace & Associates, CPAs, and Henry Yoshida, certified financial planner and co-founder of Rocket Dollar.
Here are their top tips for getting the most out of your CD investments in the current environment:
Match CD terms to your goals: Yoshida advises, “First, align [your] timeframe for money earmarked for CDs/savings before embarking on CD purchases.” If you’re saving for a house or down payment in two to four years, long-term CDs might work best. These tend to have less sensitivity to short-term interest rate cuts.Consider short-term CDs for flexibility: “Focus on short-term CDs, around six to 12 months, [if you want to] benefit from existing CD rates before a potential drop,” suggests Pace. These often offer competitive rates and let you reassess your options sooner.Try CD laddering: Yoshida recommends “laddering out from six months to five years to keep your slight edge over prevailing rates.” This means spreading your money across CDs with different maturity dates.Compare CDs to high-yield savings accounts: For short six to 15-month periods, CDs often hold higher rates than high-yield savings accounts, according to Yoshida.Take advantage of promotional rates: Pace shares an example of a client who “opened a 9-month CD at 2.5% to take advantage of a promotional rate.” Keep an eye out for these special offers.Reassess at maturity: When your CD matures, review current rates. If rates have changed, you can reinvest in another CD or explore other options.
Get started with a CD while interest rates are still high.
Why CDs remain attractive in a declining rate environment
“CDs right now are still a good investment option, even if the Federal Reserve does reduce interest rates. If you go back to 2021 CD interest rates, they weren’t even at half of a percent,” says Krisstin Petersmarck, investment advisor representative at New Horizon Retirement Solutions. This highlights how far CD rates have come, and why they’re still worth considering.
Pace advises not to wait, saying, “Though rates may decline in coming months, [you] shouldn’t hesitate to lock in existing rates, particularly through short-term CDs.” He notes that even a small rate difference can add up to thousands of dollars over time.
Yoshida shares another reason to act now. “CD rates typically lag the actual interest rate at any given time, so there’s an opportunity to [secure] some arbitrage between current interest rates and lagging CD rates,” he says. In simple terms, you might be able to get a better deal on a CD now than you would on other savings options.
The bottom line
“The best strategy is to invest in a CD now rather than waiting,” Petersmarck advises. But remember, unlike high-yield savings accounts, CDs lock up your money for a set time. You may be subject to withdrawal penalties if you need to access funds before the term ends.
To find the right fit, think about when you’ll need your cash and how much risk you’re comfortable with. Compare CD rates from different banks and lenders and don’t hesitate to ask a financial advisor for help. They can walk you through your options, explain CD terms and help you decide if CDs make sense for your financial goals.
