Getty Images/iStockphoto
Certificates of Deposit (CDs) have become a popular investment in the post-pandemic era and it’s easy to see why. CD rates rose as the The Federal Reserve raised the base interest rate to fight inflation. While interest on savings accounts with a high return also climbed, many borrowers opted for CDs over savings accounts because savings account rates are variable while CD rates are fixed.
However, CDs may be losing their appeal as a recent Fed rate cut means there are now fewer options for CDs offering yields above 5.0%. For borrowers who wonder whether they want that open a new CD or savings account before the Fed cuts rates Here too, it can be useful to see where experts think interest rates will move in October.
See here how much more you can earn on your money with a top CD.
What could happen to CD rates in October?
Here’s what some experts predict for the CD interest rate landscape this month:
CD rates are likely to drop this month
While lower inflation rates may be good news for consumers as a whole, investors who took the opportunity to purchase FDIC-insured CDs at high rates will likely be disappointed with how current economic trends are impacting CD yields in October and beyond.
“We think CD rates will decline in October,” said Gary Quinzel, vice president of portfolio consulting at Wealth Enhancement Group. “Three-month CDs are running close to the Fed Funds Rate, which was cut 0.50% in September, and markets have priced in as much as 0.75% additional cuts through December.”
Jonathan Ernest, an economics professor at Case Western Reserve University, agrees. “CD interest rates, especially for short maturities of three months and one year, tend to respond quite quickly, and correlate quite closely, with changes in the federal funds rate,” says Ernest. “As consumers expect these lower interest rates, we may see an increase in demand as they now look to earn relatively high returns before interest rates fall. This increased demand should drive yield rates lower.”
It’s not just short-term CDs that are likely to see a drop in interest rates. While the fed funds rate has a greater impact on short-term CDs, the long-term outlook for CDs is not favorable either.
“Yields for longer-term CDs are also likely to decline from recent highs,” says Ernest. “The returns needed to meet demand will depend on expectations about how the economy will perform and whether the Fed will continue its announced path of rate cuts in the coming years.”
Quinzel also believes there are reasons to expect long-term CD rates to fall further than just the Fed’s actions.
“Longer-term CD returns are also affected by other factors, such as the risk associated with a particular bank,” he explains. “Each bank has unique considerations, such as their profitability, business model, geographic location and customer base – all of which can impact returns on a CD. However, overall financial conditions remain supportive, i.e. looser than average, suggesting that stress in the banking system should not contribute to higher CD yields in the near term.”
Signs of economic slowdown, including higher unemployment rates, could also lead to lower demand for loans, creating even less incentive for banks to offer attractive short-term returns. or long-term CDs, says Quinzel.
Secure a high CD interest rate while you still can.
Investors have the opportunity to lock in an interest rate before it falls further
While CD investors may be reluctant to say goodbye to the high interest rates they enjoyed in the post-pandemic era, that doesn’t mean it’s time to give up. In fact, October could offer one of the last, best opportunities to hold on before rates fall further.
Quinzel predicts that interest rates will likely “continue to decline through the end of the year and likely well into 2025,” and Ariana Meiser, market president at Merchants Bank, agrees.
“CD rates will likely continue to decline, especially since the Federal Reserve has lowered its key interest rate,” Meiser says. “When the Fed cuts rates, banks usually follow suit by lowering the interest rates they offer on savings products like CDs. This happens because banks earn less interest on the loans they make, so they have to reduce the interest they pay on deposits to stay profitable. .”
Today, there are still opportunities to open high-yield CDs at rates above 4.00%. If you take action now, these rates will be locked in for the duration of the CD term. With experts predicting a continued decline in CD yields, these opportunities may not be available for long.
“Unless inflation rates go up materially, which we don’t expect, the Fed appears to want to cut rates to around 3.25% or 3.5% by the end of 2025, which should be the benchmark for where CD rates are going” , predicts Quinzel.
If you don’t want to miss the boat on CDs and lose your last chance to hang on to today’s higher yields for months or years to come, acting and loading up on CDs sooner rather than later is probably your best move.
Get started with this today.
