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If you’ve stashed money in a certificate of deposit (CD) account or high-yield savings account in the past few years, chances are you’ve enjoyed a strong rate of return on your money. When inflation hit its highest level in over 40 years, the Federal Reserve responded with a series of rate hikes, which in turn drove up deposit rates. While higher prices at the pump, grocery store and elsewhere were a burden to Americans, earning a higher rate on deposit accounts was a boon.
But as inflation cools, Fed interest rate cuts may be more likely in the second half of the year. The CME FedWatch Tool pegs the odds of a rate cut at the July meeting at 6.7%, but those odds jump significantly for the September Fed meeting. If a rate cut does occur in July or September, today’s CD rates might look especially strong in hindsight.
Given the potential interest rate changes that could occur, it may be a good idea to consider your options now, before the Fed’s next meeting in late July. And, more specifically, you may want to consider which CD term you should open this July, as the CD term you choose also affects the rate you earn. But what do experts say about choosing the right CD term now?
Find out how high your CD account rates could be today.
Which CD term should you open this July? What experts think
“Typically, banks offer higher rates on more long-term CDs to provide stable funding for their entity and encourage customers to make a longer commitment in provided funding,” said Alex Beene, a financial literacy instructor at the University of Tennessee at Martin. “In recent years, though, we’ve seen this change as many banks expect rates will fall, leading them to actually provide better rates on short-term CDs instead.”
Beene points to sustained inflationary pressure and stagnant unemployment data as a reason to consider short-term CDs right now.
“The short-term CD will more than likely continue to be the best option, as it will be equal to or higher than most long-term rates,” he says. “There’s still a common belief among banks that rates will fall at some point, and this will keep short-term rates more competitive.”
But if the Fed cuts rates soon, a longer-term CD may be advantageous, according to Derik Farrar, head of Everyday Banking & Borrowing at U.S. Bank.
“With rate cuts likely, the longest-dated CD with an attractive yield may help savers maximize their earnings,” Farrar says.
As with many financial choices, the right CD term ultimately depends on your situation and what’s right for you, experts say. Consider how soon you need your account funds and how much you want to earn while your money is stashed away as part of the process.
If you’re planning to move your money again soon or want to keep your options open, a shorter CD term might make more sense. But if you know you won’t need the money for a while, a longer-term CD could help you lock in a strong rate before they potentially fall.
Learn more about the rates you could get on today’s top CD accounts.
Should you consider a CD ladder this July?
If you’re unsure which CD term makes the most sense for your situation, building a CD ladder could give you the balance of both access to your funds and longer-term yields.
“With short-term rates likely to fall in the near future, locking in some of today’s higher yields makes a lot of sense,” says Trevor Johnson, founder of Dream Weaver Financial Planning. “One strategy I like is building a CD ladder that spans from six months to five years. That way, you secure some long-term yields before they potentially drop, but also keep shorter-term CDs maturing regularly.”
Johnson adds that a CD ladder can help you smooth out interest rate risk. “Instead of trying to time the market, you spread your deposits across multiple terms. This way, part of your money comes due regularly, and you can reinvest at current rates.”
Consider an alternative with similar returns
If you’re not keen on locking up your money in a CD account right now, a high-yield savings account may be a valuable alternative.
“They provide the interest rates that most of the best short- and long-term CDs do, but also offer the flexibility and availability of immediate withdrawals,” Beene said. “They are the best of both worlds.”
Farrar notes that with the best CD rates currently available on shorter terms, keeping your money locked in a CD may not be as much of a concern as it used to be. But if you’re concerned about not having access to your savings, a high-yield savings account is an option worth considering.
The bottom line
Deciding which CD term to open this July depends on your savings goals, how much interest you hope to earn, and how soon you want to access your money. You may want a short-term CD if you’re looking for a strong yield with quicker access to your funds, or you may prefer a longer-term CD to lock in a rate before it potentially drops. If you’re still unsure, consider building a CD ladder that helps you benefit from both short- and long-term CDs.
