You May Have More Time to Lock in a Great CD Rate. Here's Why

The Federal Reserve spent much of 2022 and 2023 raising interest rates to slow the pace of inflation. While that was problematic for borrowers, as it led to higher interest rates across a range of loan products, it was a great thing for people with money in the bank.

These days, CD rates are sitting at some of the most competitive levels we've seen in years. But once the Fed starts cutting interest rates, CD rates are apt to follow suit.

The Fed has signaled that it's looking to cut rates at some point in 2024 but has yet to commit to a specific time frame. But recent inflation data might prompt the Fed to keep rates steady a bit longer.

Inflation rose in March

In March, the Consumer Price Index, which measures changes in the cost of consumer goods and services, rose 0.4% from the previous month. It also rose 3.5% on an annual basis.

Numbers like these are unlikely to get the Fed to reverse course and start implementing interest rate hikes again. But they may not be conducive to near-term rate cuts, either.

See, the Fed has long maintained that its ideal annual inflation target is 2% over the long run. It's this level, the central bank feels, that's most conducive to economic stability.

While 3.5% isn't too far away from 2%, it's a higher level than what was recorded in February, when annual inflation was measured at just 3.2%. Because of this, the Fed may not cut interest rates at its next meeting, which is scheduled for April 30-May 1. Rather, the central bank might postpone those rate cuts to the third quarter of the year, possibly even the fourth quarter.

That's bad news for borrowers who have been waiting for interest rates to drop to sign loans. But it's good news for people with extra money who now have a bit more time to open a CD.

What CD term is right for you?

The CD rate you're able to lock in will depend on your bank and your CD's term. Right now, you're likely to snag a higher rate on a shorter-term CD than a longer-term one, since banks want to minimize their long-term risk knowing that rate cuts are in store.

Before you commit to a CD term, think about your goals with the money you're looking to lock away. If you're saving to buy a house and know you're at least two years away, you may decide to open an 18- or 24-month CD. If your plans for your money are less certain, you may want to stick to a term of 12 months or less.

Another important thing to look at is laddering your CDs. This way, you have portions of your money freeing up at varying times so that if your financial situation changes, you may not need to cash out a CD early and face a potentially costly penalty as a result.

Of course, before you open a CD, it's also important to ask yourself whether you can afford to lock your money away in the bank at all. If your car has been giving you trouble and you're anticipating a near-term repair that could cost thousands of dollars, that's reason alone to wait on a CD and put your money into a regular savings account. Similarly, if you don't have enough money in savings to cover at least three full months of living expenses, you should complete your emergency fund before putting money into a CD.

Either way, you may have a little more time this year to research CD options and come up with a plan. But you also don't want to wait too long.

We don't know what April's inflation report will look like. But if inflation creeps closer to the 2% mark, there could be a rate cut to follow. That's something you'll want to get ahead of to lock in the best rate on a CD possible.