Why you should open a long-term CD with interest rates on pause
News last week that the Federal Reserve is keeping interest rates unchanged may not have been greeted with major enthusiasm, but it also wasn't the glum news Americans had been used to either, particularly after the Fed moved the benchmark interest rate to a 22-year high in July. With interest rates on pause, even if just for the next few weeks, both borrowers and savers have a rare opportunity to reflect and reconsider their financial options.
For some borrowers, this may mean locking in a rate now, before they go even higher. This is particularly true for homebuyers, many of whom are coping with decades-high interest rates. The pause also opens a window of opportunity for savers, however, especially if the era of continuous rate hikes could be coming to an end shortly. For these savers, it makes sense to open a long-term certificate of deposit (CD) account right now. Below, we'll explain why.
Start exploring your CD account options here to see how much more you could be earning.
Why you should open a long-term CD with interest rates on pause
A long-term CD is generally considered to be a CD with a term longer than one year. Here are three reasons why savers should strongly consider opening this account type now.
Rates are high right now
While rates on short-term CDs are generally higher than long-term ones currently (a historic reversal), savers can still get substantive interest rates right now. It's not difficult to find a long-term CD with a rate of 4.5% to 5.5% or higher today, especially if you use an online bank or lender.
Compared to the paltry returns you can secure with a regular savings account (with a current national average of just 0.46%), you're losing money by not moving some or most of your funds into one of these account types now.
Get started with a long-term CD here now.
Rates will drop in the future
No one knows when CD interest rates will drop or by how much. The forecast isn't exactly clear. But it's possible rates on these accounts have already peaked, or will in the short term. While there's no specificity on when rates will drop, everyone knows that they will fall eventually, possibly before the midpoint of 2024.
It makes sense, then, to lock in today's CD rates now. This will allow you to earn interest at today's elevated rate right away, providing some buffer for when rates normalize in the coming years.
You can lock in a high rate for years
One of the most important features of a CD is particularly pertinent for long-term CDs. Remember, rates on these accounts are locked. So, even if the rate environment becomes unfavorable in the long term, account holders will still earn the interest rate they opened their accounts with.
While a long-term CD with a 4.5% rate may seem commonplace today, it may be a rarity by the time the CD expires in 2025 or 2028. Just look to the recent rates of 2020 and 2021 (when returns on CDs were less than 1%) to truly understand the benefits of opening a long-term CD right now.
The bottom line
A CD account can be a smart and safe way to grow and protect your funds in most economic climates. But in today's high-rate environment, with the possibility that continuous rate hikes are coming to an end, it makes sense for many to open a long-term CD. By doing so, they'll earn higher interest immediately and will continue to do so when rates drop in the future. And that locked rate will remain the same for years to come, injecting some much-desired predictability into your personal finances. That all being said, rates on these accounts won't last forever. So research your options and get started now!
