As the Federal Reserve’s forecast for rate cuts was pushed further into the year, savers continue to have plenty of high-rate CDs to choose from, generally with shorter terms. But are they the better savings choice in the long run, given that economists expect cuts later this year?
Short-term CDs (1 year or less) may be appealing for a quick payout and great rates, but savers need to understand the relationship between rate changes, time, and a CD.
“As of today, the Federal Reserve’s Summary of Economic projections estimate rates will decrease by about 1% in 2025 and another 1% in 2026,” according to CD Valet’s Bryan Johnson.
What does that mean? Over three years, you could have the option to roll $10,000 into three consecutive 1-year CDs starting at 5.25% Annual Percentage Yield (APY) the first year, 4.25% APY the year after, and 3.25% APY two years later versus one 3-year CD today at a fixed rate of 5.15% APY. Before choosing the best offer, savers should consider the implied forward rate – that is the 1-year CD rate a year from now and the 1-year CD rate two years from now and how those returns compare to current rates on longer-term CDs.
If the Federal Reserve’s projections are correct, your three consecutive one-year CDs of $10,000 will only grow into $1,329 in interest versus earning $1,625 in one 3-year CD at a fixed rate of 5.15% APY. The implied rate for the set of three-year CDs is 4.25%. In an uncertain rate environment, a longer-term CD at a fixed rate is generally the way to earn more.
Currently, 3-year rates are averaging between 4.0% and 4.8% APY. As of June 21, 2023, CD Valet, features a particularly great offer for a 3-year CD at 5.15% APY. CD Valet is an online marketplace for consumers to find the most competitive CD rates nationwide,
Remember, the compounding effect of interest over time on a CD is where a consumer can truly get more bang for their buck. Johnson adds, “Compared to the rate projections by the Federal Reserve and Treasury market, savers can make an extra 0.35% to 1.00% APY for that term. It might not sound like much, but over time thanks to compounding interest, those differences can matter, resulting in hundreds or even thousands of dollars more.”
*Annual percentage yields (APY) not offered by CD Valet but based on data from various institutions as of 6/21/24 and subject to change. Early withdrawal penalty and additional restrictions may apply.
