Presidential election outcomes can, in some cases, affect the broader economy. Prior to the Federal Reserve Board’s most recent rate drop at their September 2024 meeting, Goldman Sachs analysts highlighted two possible scenarios based on potential shifts in leadership. In one, the economy could slow down, which might lead the Federal Reserve to lower interest rates in response to declining growth.
On the other hand, inflationary pressures could emerge if certain policies—like tariffs—were implemented or increased.
“The Federal Reserve might feel compelled to keep interest rates high to control inflation, even as the broader economy slows down. Both scenarios could occur at the same time, leading to a situation where short-term interest rates (which directly influence CD rates) remain high, while longer-term rates fall, potentially inverting the yield curve,” according to CD Valet’s Head of Finance, Bryan Johnson.
The Role of the Federal Reserve and CD Rates
While the Federal Reserve is generally independent of political influence, some election cycles have brought attention to the Fed’s role in managing interest rates. Public discourse often centers around whether rates should be adjusted to support economic growth or to control inflation. However, the Fed’s primary responsibility is to manage inflation and unemployment, regardless of political outcomes.
The Federal Reserve’s policy decisions can significantly affect CD rates, particularly shorter-term CDs of 1 year and less. If future administrations or policymakers advocate for lower rates to stimulate economic growth, the Fed may respond by reducing rates further. For CD holders, this favors locking in a CD before additional rate cuts, versus waiting until after the election, when rates may decline further.
Recent Federal Reserve Actions: September 2024 Rate Cut
At the September 2024 meeting, the Federal Reserve cut rates by half a percentage point, signaling that it’s focused on maintaining economic stability as inflationary pressures ease. This action suggests that the Fed may continue to lower rates in the near future, especially if the economy slows down further. Lower interest rates generally mean lower returns on CDs – generally being the key word. Another variable to consider is the yield curve, which has been inverted for quite a while, offering higher returns on short-term maturities and lower returns on the long side.
The Treasury yield curve is steepening, specifically in relation to the difference between 2-year and 10-year rates. Before and since the rate cut, shorter-term Treasury yields have fallen, driven by the Fed’s actual and expected rate cuts, but longer-term Treasury yields have increased. As shorter-term yields drop while longer-term yields rise – or fall more slowly than shorter-term yields – the yield curve un-inverts and is known as a “curve steepener”. Savers should keep an eye on the yield curve in the months to come as they consider their plans and have CDs maturing and ready for reinvestment.
What Should You Do?
Ultimately, the decision to open a CD before or after an election depends on your personal financial strategy. If you’re seeking stability and want to avoid potential rate cuts, now could be an ideal time to lock in a rate. Conversely, if you’re willing to wait and watch how the economy and interest rates evolve, post-election conditions may offer different opportunities. Either way, a CD can provide a safe and reliable option during times of uncertainty.
FAQs
What should I consider when deciding on a CD term length in relation to the elections?
Consider how long you want to lock in your rate versus potential changes in interest rates post-election. Shorter terms may offer flexibility if rates rise again, while longer terms can secure current high rates.
What are the risks of waiting to open a CD until after the 2024 elections?
Waiting could expose you to falling rates if the Federal Reserve decides to cut rates in response to economic slowdowns or other policy changes resulting from the election.
How might the 2024 elections impact CD rates?
The outcome of the elections could influence economic policies that affect interest rates. If a new administration prioritizes economic growth, the Federal Reserve may lower rates, which could lead to decreased CD rates.
