Yahoo Finance Are Long- or Short-Term CDs a Better Investment in 2024?
One benefit of the Federal Reserve’s series of interest-rate hikes over the past couple of years is they boosted savings rates for bank customers — including those who invest in certificates of deposit. It’s not uncommon to find CD rates of 5.0% or higher in 2024, which is well up from the sub-1.0% rates that were offered for most of the previous decade.
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This means now is a good time to land the best CD rates. The catch is, you’ll mainly find the best rates on short-term rather than long-term CDs. Experian defines short-term CDs as those with terms that last three months to a year or slightly longer, while long-term CDs typically have terms of three years or longer.
How big is the difference between short- and long-term CD rates right now? Just check out the rates offered by Bank of America. It currently offers a 5.0% annual percentage yield on its 7-month featured CD, while its 37-month featured CD offers an APY of only 0.05%. On standard CDs, customers get an APY of 4.0% on terms of three through five months and 0.03% on everything else.
There’s no mystery as to why banks are currently offering better rates on short-term CDs than long-term ones: They know that today’s high interest rates won’t last forever, and once rates go down again, they can offer lower CD rates without losing too much business. Most banks don’t want to offer a 5.0% CD rate for five- or 10-year terms when overall rates could slip.
The Fed’s effective federal funds rate currently stands at 5.33% — a high figure designed to tame inflation. But with inflation easing, the central bank has put the brakes on rate hikes. Its goal is to eventually get the target rate down to 2.0% or so. When that happens, you can expect banks to drop their CD rates, as well.
“Banks set rates on CDs based on the Federal Reserve’s lending rate,” said Chance Robinson, chief financial strategist at Florida-based Strong Point Financial told CBS News. “With rates holding steady at the Fed’s last meeting and their prediction for multiple rate cuts, it’s very likely that CD interest rates will drop in 2024. Especially now that we’re also entering an election year, the best thing the Fed can do is lower interest rates to stimulate the economy.”
The prospect of banks lowering CD rates in 2024 means you’re probably better off investing in long-term CDs to lock in today’s higher rates — especially at banks that offer competitive APYs. For example, some banks and credit unions currently offer 5-year CD rates of 4.0% and higher, including Alliant Credit Union, Quontic Bank, Bread Financial, Barclays Bank and Ally Bank.
Locking those rates in now guarantees a good return on your money for the next five years. That guarantee might not be around if you wait until next year or later to invest in a long-term CD.
But your personal decision depends on how much money you can afford to tie up for a half-decade or longer. With CDs, you can’t access the money until the maturity date unless you are willing to pay an early-withdrawal penalty. If you need access to the money sooner, then you’re better off with a short-term CD.
“Short-term CDs are ideal for those that want flexibility for other purchases or investment options,” Matt Willer, partner at Phoenix Capital Group Holdings in Colorado, told CBS News.
Another option is to invest in a CD ladder that lets you split your initial deposit into a series of CDs and set each one to mature at a different time. This gives you periodic access to some of your money while the rest of it keeps earning interest.
This article originally appeared on GOBankingRates.com: Are Long- or Short-Term CDs a Better Investment in 2024?
