FICS Editors' Note

On Wednesday, July 31, 2019, the Federal Reserve cut its benchmark interest rate by one quarter percentage point to a target range of 2% to 2.25%.

Short-term CDs are the smart money move, thanks to the Fed

  • By Matthew Goldberg,
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After seeing her savings account rate decrease around a month ago, Anna Sergunina wanted to control the rate on a portion of her emergency fund.

Sergunina, a certified financial planner, knew a short-term CD would give her this opportunity.

“I just noticed the rate drop on my savings account and wanted to lock in a higher rate,” Sergunina says.

Rates on top-yielding savings accounts and money market accounts began decreasing in June. The decreases have been around only 10 basis points, or 0.1 percent, though rates could fall further after a rate cut from the Federal Reserve on Wednesday.

While many top-yielding CD rates have also been declining, you can still lock in a short-term CD to protect yourself from additional rate cuts.

Why you should consider a short-term CD

If you’re considering a CD, now could be the right time to act.

The Federal Reserve cut the federal funds rate 25 basis points at the end of its July meeting. Though CD rates tend to track Treasurys more closely than the federal funds rate, some banks may cut CD rates further sometime after the Fed’s decision. The number of expected future rate cuts mentioned on Wednesday can impact CD rates, says Adam Stockton, director of consumer pricing at Novantas.

If CD rates do move after the Fed meeting, they will likely move lower.

“If you’ve been on the fence, get off the fence and move because rates are already falling and just continue to in the weeks to come,” says Greg McBride, CFA, Bankrate chief financial analyst.

Generally, CDs offer a fixed APY for the term of the CD. You can still find one-year CDs paying more than 2.5 percent APY at some online banks. You can even find top-yielding CDs that require a low or no minimum deposit.

Keep the CD terms short, though. Top five-year CDs currently offer around 3 percent APY, but the extra yield isn’t worth locking up your money beyond one to two years.

“Yes, rates might drop. But even then, you’re earning a max of 3 percent,” McBride says. “If we end up having a recession, there’s going to be a lot of other assets that go on sale. You may find a better use for that cash that brings in a lot more than 3 percent at the time.”

When a short-term CD makes sense

A short-term CD is a great place to earn a fixed APY on money you won’t need to access until after the term expires.

Most high-yield CDs charge early withdrawal penalties, so if there’s a chance you’ll need the money, stick to a savings account or money market account.

“My advice to consumers is always make the decision that makes the most sense for you given the rates that you’re seeing today,” Stockton says. “It’s possible that in a month or two, the rates will move in a direction where you regret that. And it’s possible that rates will move in a direction where you’re very happy you made the decision you did.”

Even though there have been CD rate decreases that started around March or April at some of the top-yielding banks, some institutions may cut rates further after the Fed announcement.

“We think there could absolutely be more rate cuts to come, particularly at some institutions who really haven’t cut rates as significantly as you might expect given where the one-year benchmarks have gone since the start of the year,” Stockton says.

Factors to consider when shopping for a CD

Consider these important factors when searching for a CD:

  • APY: The amount of interest that you’re going to earn is the top reason you’re getting a CD. Make sure you compare rates to get a competitive yield. Getting a yield that’s more than 2.35 percent APY, on a CD that’s for two years or shorter, shouldn’t be difficult.
  • Minimum opening deposit/balance requirement: Make sure the money you want to deposit in a CD aligns with the minimum balance requirements. There are options that have both a low minimum balance requirement and a competitive APY.
  • Purpose of the money: If this is money is earmarked for buying a house in the near future, then a CD probably isn’t the right place for these funds. But if this money is meant to be used during a time horizon longer than two years, a two-year CD – or a CD with a shorter term may be the appropriate place for this cash to grow with a fixed APY. A CD also isn’t the best place for money that is likely to be needed in the short term.
  • Early withdrawal penalties: Find out the CD’s early withdrawal penalty. Better yet, make sure you’re putting an amount in a CD that’s very unlikely to be needed during the CD term. If that means putting a little less in the CD – and putting a portion in a savings account – that’s a sound strategy.

Keep track of when your CD is going to mature so that you can evaluate whether the APY changed at the end of your term. Even if it increases, there could be better options available upon maturity.

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