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What the Fed's changing rate stance means for your CDs

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  • Not long ago, market expectations were for four more Fed rate hikes in 2019.
  • But as conditions changed, so has the Fed's outlook, with a cut becoming its most likely next action.
  • That has already brought a nice steady rise in CD interest rates pretty much to a halt.
  • Still, savers have some options to protect their CD earnings.

Up until late 2018, it appeared interest rates would keep rising through all of 2019. Each quarter in 2018, the Fed raised the federal funds rate and signaled that more rate hikes should be expected in 2019.

But these expectations began to change in late 2018 as the stock market sank, bond yields fell and global economic concerns grew. The Fed's last rate hike was in December 2018. And in the first half of this year, the Fed transitioned from a "patient" stance to one where it "will act as appropriate." The markets have interpreted this to mean the Fed could start cutting rates at its next meeting, in July. 

Even without a rate cut, the change in market sentiment and expectations about the Fed have put downward pressure on deposit rates. This is apparent from a nationwide survey of rates at 6,790 banks and credit unions. In the survey of 1-year CDs, the average yield increased from 1.16% in November 2018 to 1.36% in March 2019.

That growth has slowed since March, with the average yield rising only to 1.39% in June. For 5-year CD yields, growth has transitioned into a decline. In the survey of 5-year CDs, the average yield increased from 2.11% in November 2018 to 2.26% in March 2019, when it started to slide, falling to 2.23% in June.

Larger CD rate declines have been observed at online banks. Their CD rates reached a peak in late 2018 and early 2019. Since then, rates have fallen, with the largest drops occurring over the last month.

For example, a survey of CD rates at five large online banks reveals a clear downward trend. In early 2019, online CD rates reached a peak. During this time, 5-year and 1-year CD yield averages of the five large online banks surveyed reached 3.08% and 2.74%, respectively. As of June, these averages have fallen to 2.87% and 2.55%, respectively.

CD investors need a new strategy

With the decline in interest rates gaining momentum, it makes sense for investors to consider long-term CDs before rates drop further. Should the Fed start cutting rates, CD rates will fall faster. In addition, widespread cuts to savings account rates should be expected.

If the idea of locking your money into a long-term CD doesn't appeal to you, look for CDs with mild early withdrawal penalties. If you need the money from a CD for unexpected expenses or to take advantage of higher rates (hey, you never know), a small early withdrawal penalty lets you get your principal from the CD without too much cost.

An example of a mild early withdrawal penalty on a 5-year CD is six months of interest. In this case, an early withdrawal after one year would result in losing half of your accrued interest.

No-penalty CDs

If you need to keep your savings accessible without worrying about an early withdrawal penalty, there's another option besides a savings account. A few online banks now offer no-penalty CDs. Like standard CDs, no-penalty CDs have a rate lock, but they allow full withdrawals without penalty any time starting from seven days after the account opening to when the CD matures.

No-penalty CDs have liquidity that's similar to savings accounts, but unlike savings accounts, they have a rate lock that's very appealing when rates are falling.

The downside of the no-penalty CDs that are currently available from online banks is that the rates are generally lower than standard CDs with comparable maturities. Here's another: No-penalty CDs have fairly short terms, rarely exceeding around one year. Thus, the rate lock will only offer limited advantage. When the CD matures, rates on new CDs may be disappointing.

Hedging your bets with CDs

Even though it appears interest rates will be falling this year, there's no guarantee that will be the case. No one can accurately predict future interest rates, especially one or more years in the future. So it makes sense to hedge your bets by choosing CDs with mild early withdrawal penalties or no penalties at all. This will help you maximize earned interest regardless of how interest rates change.

Ken Tumin is founder and editor of, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.

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