Staying Fit
The Federal Reserve has signaled it has stopped raising short-term interest rates at least for now and may even start cutting rates in 2024, depending on the direction of the economy. If that’s the case, returns on savings may have peaked, begging the question: Should you snatch up bank certificates of deposit (CDs) paying 5 percent or more now before it’s too late?
After more than a decade of near-zero returns, some CDs now yield as much as 5.75 percent.
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That’s because the Fed has steadily raised its key short-term interest rate 11 times since March 2022 to fight rising inflation. The Fed’s current target range for its key rate, which influences rates on everything from car loans to bank accounts, is between 5.25 percent and 5.5 percent.
Retirees and others on fixed incomes have benefited from the resulting higher savings rates. You can even get as much as 5.3 percent for bank money market accounts. (Some regular banks haven’t gotten the news and still offer as little as 0.1 percent.)
If you need a microscope to see the yield on your savings — your bank isn't required to raise rates just because the Fed does — it may make sense to grab higher yields now. A $10,000 deposit earning 0.1 percent will give you $10 a year in interest, enough for a candy bar or two. At 5.75 percent, that’s $575, enough to buy several fancy meals. “Now is an excellent time to purchase CDs and lock in historically strong returns,” says Bryan Johnson, chief financial analyst at CDValet.com.
Those yields won’t be there forever now that the Fed is telegraphing that its next move will likely be to cut interest rates, rather than increase them. “If you’ve been waiting, now is the time to lock in rates," says Greg McBride, chief financial analyst for Bankrate.com. If inflation does indeed fall next year, as some economists predict, your inflation-adjusted return will be even higher.
How to do it
Shop around for CDs. Check rates on websites such as Bankrate.com or CDValet.com to get a sense of the range of current offerings. Online banks often dangle the highest yields because their overhead is lower. Also stop by your local bank or credit union to see if their CD rates are competitive. Sometimes they will offer special rates to customers who meet a minimum deposit requirement, perhaps $5,000.
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