Will CDs Still Make Sense When and if Interest Rates Fall This Year?

Any money you have earmarked for emergency expenses should go into a regular savings account. And money you're reserving for a far-off goal, like retirement, should be invested in a brokerage account or IRA for a higher return. But if you have money for an in-between goal -- say, one that's a year or two away -- then opening a CD could make sense.

With a CD, you're committing to leaving your money in the bank for a period. And there can be penalties for taking an early withdrawal. However, you'll generally get a higher interest rate on a CD than a savings account. Also, that rate is guaranteed for the duration of your CD's term.

Right now, CD rates are up following a string of interest rate hikes from the Federal Reserve. The Fed raised interest rates 11 times between 2022 and 2023 to help slow inflation, and that's benefitted people with money in the bank.

But now, the Fed has signaled that it's looking to cut rates in 2024. And that begs the question: Will CDs be worth it once that happens?

This year's rate cuts shouldn't be extreme

The Federal Reserve's next policy meeting begins at the end of April. The next meeting scheduled after that is mid-June. Based on how inflation is trending, it wouldn't be surprising to see the Fed keep interest rates steady at its next meeting and wait until June or later to start cutting rates.

From there, it's a question of how many rate cuts come down the pike this year. And the most likely answer is two to three. This could change, of course, if inflation starts moving in an unfavorable direction as 2024 chugs along.

But all told, the Fed is not expected to lower rates drastically. While we could see two to three rate cuts this year, that may not drive CD rates down all that much.

Right now, many banks are offering 12-month CDs at around 5.00% APY. By the third or fourth quarter of the year, savers who open a 12-month CD may only be looking at 4.00% or 4.50%. But that's a pretty good rate of return given that there's no risk involved.

When you buy stocks, you risk losing money. Even so-called safe investments like bonds carry risk.

But if you bank at an institution that's FDIC insured and keep your account balance to $250,000 ($500,000 if you have a joint account holder), then your money is fully protected in the event of a bank failure. Even if CD rates fall this year, they'll probably still be a good deal.

What about future years?

While it might still make sense to open CDs later in 2024, it's hard to predict how fast rates will fall beyond that point and whether CDs will continue to make sense. Committing to locking up your money is a lot less appealing when it means getting 1.75% on your deposit, as opposed to the rates that are available today.

There's a good chance CD rates will remain attractive into 2025. Beyond that, it's hard to know. So if you're someone who's interested in putting money into CDs, your best bet is to track rates at different banks, but also follow the news and pay attention to what the Fed is doing with interest rates. That could be your best indicator.

Meanwhile, if you have money available now to put into a CD, don't wait. The rates available today may not be around much longer. If you're sitting on some savings because you hibernated during the winter or received your tax refund, compare CD rates in the coming weeks and lock one in before those rates start to fall.