Why December Might Be the Best Month to Get a CD

Taylor Swift may be Time magazine's person of the year, but for people with savings, 2023 has undoubtedly been the year of the CD. If earning fixed income is your jam, then today's top-paying CDs are your bread and butter, with APYs getting closer to 6% on short terms.

It's been a great year to have extra savings, but if you haven't capitalized on certificates of deposit yet, December might just be the best month to start. Here's why.

Rates are high, but they might not stay this way for long

The biggest reason to lock in a CD now is that it's very, very likely that CD rates will drop sometime in 2024.

To understand why, recall that CD rates are tied to the federal funds rate, which is currently sitting at a range of 5.25% to 5.50%. The Federal Reserve has gradually been hiking rates up to this range since March 2022, with almost no end in sight. Its tone changed significantly, however, in its December 2023 meeting, during which it signaled that rate hikes might be over. In fact, 17 of the 19 Fed policymakers now believe rates will be lower at the end of 2024 than they are today. This is in line with the continued decrease in annual inflation, as well as in the Fed's last three decisions not to raise rates.

With the majority of Federal policy makers lacking confidence in continued rate hikes, it's safe to say the CD party is almost over. In fact, I would even venture to say that short-term CD rates have already passed their peak. To give you some perspective, here's how the national yield on a 3-month CD has changed since January 2023.

Based on this data, short-term CD rates very likely peaked in September 2023 and have since been slowly falling. Since banks, credit unions, and other CD providers base rates on what the Fed predicts, it's very likely we'll see these rates continue to fall going into 2024. That would make now the right time to lock in a CD, if you know one is right for you.

You might squeeze more interest out of a CD with a longer term

Right now, short-term CDs -- like those with a 12-month term -- offer higher interest rates than CDs with longer terms. This reflects the expectation that the federal fund rate will fall sometime in the future. Banks want to keep rates competitive, but if they're paying high interest for two to five years, they could end up losing money.

Even if they don't have the highest APYs, long-term CDs could also be a smart move right now. You'll lock in an elevated rate for several more years, and you won't have to worry about rates falling in 2024. This is especially true if you have savings that will just sit in a savings account anyways. As long as you don't need that cash, you might as well lock in the higher rate while it's still here.

Of course, you could also open multiple CDs. In fact, now might even be the best time to build out a CD ladder, combining short and long terms. This could give you more liquidity and ensure you're never more than a few months away from accessing money in a CD. Some CD terms you might want to add to your rungs include:

• 6-month CDs
• 12-month CDs
• 18-month CDs
• 2-year CDs
• 3-year CDs
• 4-year CDs
• 5-year CDs

All things considered, if you know a CD is the right savings product for you, I wouldn't hesitate to open one. While no one can predict the future, all signs are pointing to lower CD rates in the near term. Check out today's top-paying CDs and lock in a high rate before they change.