Take Advantage of High CD Rates and Protect Your Savings
In light of the Federal Reserve’s aggressive rate hike policy, CD rates have surged, presenting a golden opportunity for investors. While the Fed has paused its rate hikes for now, the likelihood of rates declining in the near future seems slim. This makes it an ideal time to secure attractive CD rates.
Why Consider a CD Now?
Certificates of deposit (CDs) are savings products that offer interest on a fixed sum over a specific period. Unlike regular savings accounts, withdrawing funds from a CD before its maturity date typically incurs penalties. However, in exchange for this commitment, CDs generally offer higher interest rates compared to standard savings or money market accounts.
With the Federal Reserve gradually raising its benchmark federal funds rate, investors have increasingly turned their attention to CDs. The past year has seen higher interest rates, making CDs an appealing option for growing savings.
Lock In Favorable Rates
Currently, the Fed funds rate stands at its highest level since 2007, just before the Great Financial Crisis. The Fed has indicated that it is unlikely to cut interest rates until 2024. Given that CD rates are influenced by the fed funds rate, it appears that attractive CD rates will remain available for the foreseeable future. You have the choice to secure a favorable rate now or wait for the potential future rate hikes alluded to by the Fed after their recent FOMC meeting.
However, predicting economic conditions can be challenging. If circumstances change, the Fed will adjust its approach accordingly, potentially altering the guidance provided. Therefore, it’s important to seize the opportunity while rates are favorable.
Currently, a variety of CDs offer over 5.00% APY with different terms. Smaller institutions and online banks often provide higher rates due to lower overhead costs. The interest rate and minimum deposit requirement depend on the CD’s terms, as outlined below:
- 3 months: 5.16% APY with a minimum deposit of $25,000
- 6 months: 5.65% APY with a minimum deposit of $10,000
- 1 year: 5.50% APY with a minimum deposit of $10,000
- 18 months: 5.45% APY with a minimum deposit of $10,000
- 2 years: 5.25% APY with a minimum deposit of $5,000
- 3 years: 5.13% APY with a minimum deposit of $1,000
- 4 years: 5.00% APY with a minimum deposit of $500
- 5 years: 4.77% APY with a minimum deposit of $25,000
Keep in mind that CD rates can change daily, so it’s essential to regularly check the best CD rates to stay informed about your options.
Beat Inflation with CDs
CDs can act as a hedge against inflation, particularly when inflation rates are decreasing. In May, the Consumer Price Index (CPI) rose by 4%, significantly lower than the 9.1% increase observed in June of the previous year. As inflation erodes the purchasing power of money, investing in a CD with a rate exceeding the inflation rate (currently 4%) helps mitigate its negative impact. For instance, 1-year CD rates for May at 5.28% surpassed the inflation rate for the same period.
Consider Tax Implications and Deposit Insurance
It’s important to note that gains from CD investments are subject to capital gains tax. Additionally, in the event of a bank or credit union failure, as long as the issuing company is a member of the Federal Deposit Insurance Corporation (FDIC), your CDs are eligible for deposit insurance coverage up to $250,000.