The Federal Reserve has been highly predictable for the last few years thanks to Covid and a brittle economy, but high inflation changed the game. Now knowing if you should open a CD before the next Fed meeting is a little trickier. However, this Fed hasn’t changed its stripes and predicting the Fed’s moves in the short term is still easy enough to make decisions with your money.
Should I Open a CD If the Fed Is Raising Interest Rates?
If you bought a 5-year CD paying 1.45% a year or two ago, that probably feels like a bad move buying a CD. Don’t feel too bad you aren’t the only ones. Professional asset managers bankrupted a favorite Silicon Valley stock by buying long-term treasuries when they were paying pennies. Like you, they took what they could get.
Ideally, you want to wait until the Fed raises interest rates before buying a CD. Higher rate CDs mean more interest for you. However, you have to remember about opportunity cost. Opportunity cost is the value of what you could have been doing with your money while you were doing something else, like waiting for the Fed to raise interest rates. That is, are you better off buying a CD now before the Fed raises interest rates and earning CD money right away, or are you better off earning nothing in your savings account while you wait for higher rates from the Feds?
The Best CD Options to Buy Now
The good news is that choosing to buy a CD is not an on or off decision. There are lots of varying factors that can make you a winning CD investment no matter what the Fed decides to do.
CD Length if Maturity
In a standard, textbook, financial world, the longer the maturity of your CD or other investment, the higher the interest rate. This makes perfect sense. If I wanted to borrow money from you for 6 months, that is less of an ask than offering to pay you back in 3 years. You would, naturally, want a higher interest rate for the longer loan. A CD can be thought of as a loan to the bank. They should be willing to pay more for a longer term.
But, this isn’t a frictionless plane in a vacuum (it’s a physics joke). In the real world, the Fed only has control over short term interest rates. Longer-term rates are set by the markets. Right now, the markets are asking the same question you are. Is it worth locking up money in a longer-term investment or is the smart move waiting for better rates?
Right now, the answer is that fewer investors are interested in locking up their dollars in fixed-rate investments for longer periods. This is a combination of the likelihood the Fed will raise interest rates and the potential opportunity costs for money in fixed rate investments like CDs. The result is that there is a sweet spot around 12-month CDs.
Best 12-Month CDs Rates
Pop over to your favorite CD interest rate website or take a peek at your bank CD offers or credit union CD offers. You are going to find the highest interest rates at, or around, 12 months. This chart from Colorado credit union Bellco Credit Union shows a 5.50% rate for a 6-month CD. The incredible part is how much LOWER long-term CDs are. (Take a look at your bank’s promotional rates. They may be even higher.)
Wells Fargo has a 4.65% 5-month CD for existing customers and then abysmal interest rates for anything else including a meager 1.5% for its 12-month CDs. Some banks have good rates and offer penalty free CDs.
In other words, find your preferred shorter-term interest rate and get your money invested and earning interest.
But What If the Fed Raises Interest Rates?
Aye, there’s the rub. The Fed might raise interest rates at its next meeting. The current consensus is that it might do so at just 0.25% increase, which unless you are dumping the maximum FDIC insured value of $250,000 isn’t going to be much as a real dollar value.
If you put $100,000 in a 12-month CD paying 4.5% you’ll end up with about $4,500.
If you wait a month and put $100,000 in a 12-month CD paying 4.75% you’ll end up with about $4,750. Don’t forget you’ll get it a month later and you’ll miss out on whatever the difference was between where you were keeping that $100K was paying and the CD interest rate.
In other words, if you are looking for a CD investment, watch the terms and rates carefully. The longest terms are not the highest interest rates right now. The highest- interest CD rates come in the form of marketing specials, or around the 12-month maturity length.
Pssst. Hey kid! Wanna buy a brokerage account?
There is a Secret Option C if you are that kind of rate shopper.
Most brokerage accounts like Fidelity and Schwab and most of the others offer various money market accounts to hold your cash in that are paying strikingly similar rates to many 12-month CDs with no penalty for early withdrawal. Even better, they have a flexible rate that allows you to earn real interest immediately, while also benefiting from rising interest rates.
Just as a quick interest check, the Fidelity Money Market Fund currently has a 7-day yield of 4.81%. That’s close to what a lot of CDs out there are paying, without needing a minimum balance or having a maximum balance or membership requirement.
Of course, if you are a Fidelity customer, your teenage child might show up one day with a special where a teen gets $50 free for opening an account, and when given access to the world of the brokerage shows up wanting to purchase specific bank CDs. Fidelity does not allow youth accounts to buy bank CDs, so they say. He bought one though. Did the research. Noticed only certain ones allowed $100 investments instead of $1,000 and ended up with a 15-month CD from Bank of China New York City paying well enough that he doesn’t care about higher rates… yet. Of course, it matures this fall, so he doesn’t have to wait long to pick a new investment.