Are you considering parking your money in a certificate of deposit (CD)? It’s a safe way to grow your funds and offers a guaranteed return. But you may wonder if rates are slated to increase, which could boost your earning potential even more.
Read on to learn more about the factors affecting CD rates, historical trends and predictions for 2024.
Understanding Certificate of Deposit (CD) Rates
Before diving into rate projections, it’s worth understanding the specifics of CDs and how rates work.
What is a Certificate of Deposit (CD)
A certificate of deposit (CD) is a savings product offered by banks and credit unions. It provides a safe way to grow your money and generally pays more in interest than a traditional savings account. But there are a few catches.
For starters, once you open a CD, you can’t make additional deposits. And the funds must sit in the CD for the entire term to earn the advertised rate. Otherwise, you’ll likely incur an early withdrawal penalty.
How Do CD Rates Work?
CD rates are determined by factors like market interest rates and the Federal Reserve’s policies. They are usually expressed as an annual percentage yield (APY), which shows the total interest earned over a year, factoring in compounding. Banks typically offer higher rates for longer terms.
When you commit to a CD, you lock in the rate for the entire term. This means if market rates change, your CD rate will remain the same, providing a predictable return.
Factors Affecting CD Rates
Various factors shape the rates you can get on a Certificate of Deposit (CD). The most important thing to consider is the CD’s term length and the deposit amount you choose. Economic conditions and the current interest rate environment also play a significant role.
Term Length
Again, the longer the CD term, the higher the APY offered by most banks and credit unions. This is because financial institutions have more time to invest your money to extend loans to other customers and earn interest. That said, some may offer short-term CDs with impressive APYs to attract more deposits from customers.
Deposit Amount
The more you invest, the greater your earning potential. Some entities also feature a tiered earning structure. So, a larger deposit could also earn you a higher rate, as banks and credit unions tend to reward higher balances with better CDs.
Economic Conditions
Current economic conditions also play an integral role in the rate you’ll receive. When the Fed implements rate hikes to fight inflation or cool down an overheated company, the APYs on CDs generally follow suit. The opposite is also true – rate cuts typically mean lower APYs, as you may have noticed with the recent cut in September 2024.
Other Factors
Other factors like bank policies, competition among financial institutions, and promotional offers can also impact CD rates.
Again, some banks and credit unions might offer higher rates during promotional periods to attract new customers. And competition might entice financial institutions to increase rates to differentiate themselves.
Sometimes, local credit unions or smaller banks may offer better rates than larger, national banks to attract more customers.
Historical Trends in CD Rates
Below is a closer look at how CD APYs have changed over time.
CD Rates Over the Past Decade
Over the past decade, CD rates have gone through various changes. Around 2014, rates were relatively low, often under 1%, reflecting the impact of the financial crisis and subsequent recovery period.
By 2019, rates began to rise as the economy improved and the Federal Reserve adjusted interest rates. The pandemic in 2020 caused rates to drop again, with one-year CDs often offering just 0.1% APY.
Since then, rates have increased gradually. As of late 2024, the average rate for a one-year CD is about 1.72% APY, showing a recovery from earlier lows.
Impact of Economic Events on CD Rates
Economic events have played a crucial role in shaping CD rates. The 2008 financial crisis led to a period of historically low rates as the Federal Reserve tried to stimulate the economy. This low-rate environment persisted for several years.
During the COVID-19 pandemic in 2020, CD rates fell sharply again due to the economic downturn. To counter inflation, the Federal Reserve later increased rates, leading to a rise in CD rates.
In 2024, CD rates have started to decline due to recent rate cuts aimed at managing inflation. Economic conditions continue to heavily influence these rates.
Current Economic Climate
You can better predict future CD rates by understanding the current economic climate.
Overview of the Economic Landscape
Inflation is still a factor, but as previously mentioned, the Fed recently cut rates. That’s an encouraging sign, as it means the Fed is doing its part to keep inflation in check and help stabilize the economy.
Key Indicators to Watch
As you continue to monitor the current economic climate, keep an eye on inflation rates, Fed policies and employment figures. All of these give you an idea of what’s to come in the financial markets.
Predictions for CD Rates in 2024
Here’s what to expect for the remainder of 2024.
Expert Opinions and Forecasts
Some believe rates will remain high due to strong economic growth. Others predict a decline as the Federal Reserve might cut rates again to stimulate the economy.
Role of Federal Reserve Policies
Again, the Federal Reserve plays a significant role in setting CD rates. If the central bank opts to lower interest rates to boost economic activity, CD rates may decrease. However, higher interest rates set by the Fed could lead to increased CD rates.
Possible Factors That Could Influence CD Rates in 2024
The Fed’s interest rate decisions, economic growth, recession fears, and political and global economic events may all influence how CD rates play out for the remainder of the year.
Federal Reserve Interest Rate Decisions
The federal funds rate is a benchmark that affects borrowing costs and serves as a guide for what savers can expect in returns.
Again, when the Fed increases rates to combat inflation, you might see higher CD rates offered by banks. But, if the Fed lowers rates, the effect is often a drop in CD rates, making it less attractive for savers but possibly facilitating economic growth.
Economic Growth and Recession Fears
As previously mentioned, the state of the economy plays a significant role in CD rate movements. Strong economic growth typically encourages higher rates because banks are more willing to offer better returns when the economy is booming. This is due to increased demand for borrowing and investment activities.
On the other hand, fears of a recession can lead banks to lower CD rates. In times of economic downturn, the goal often shifts to encouraging spending and borrowing. As a result, you could expect to earn less from CDs during such periods.
Political and Global Economic Events
Political events and global economic situations have a non-negligible impact on CD rates. Events like an election or significant policy shifts can also create economics that significantly affect interest rates.
Impact of Potential CD Rate Changes
Here’s a look at how changes in CD rates could impact your savings strategy.
Benefits for Savers and Investors
When rates increase, savers often take advantage to maximize their earning potential. CD laddering is also a strategy that’s usually leveraged to capitalize on high APYs while maintaining liquidity. It involves investing an equal amount of money into three or more CDs, each with different terms, to get the benefit of staggered maturity dates.
Implications for Financial Institutions
As rates rise, financial institutions often find themselves having to compete to attract new business. Many roll out promotional rates, often for a short period, to draw in additional deposits.
Conclusion: Should You Get a CD in 2024?
A CD is a safe bet if you want to earn competitive yields without putting your investment at risk as you would with a stock, bond, mutual fund or other form of security. However, you forfeit liquidity and, sometimes, greater earnings in exchange for these luxuries.
If you’re open to taking on more risk, an alternative form of investment may be better. But if you’re risk-averse and prefer more liquidity, consider a high-yield savings account. The returns are variable, which means you could earn less, but you’ll have penalty-free access to your money.
