Certificates of deposit (CDs) are among the safest investments for novice or risk-averse investors. This is because CDs are FDIC insured for up to $250,000, safeguarding your capital from potentially large losses.
No matter your appetite for risk, staying informed about interest rates is key to a robust CD investment strategy.
After all, the interest is what earns you money on a CD investment — the higher the rate, the more money you’ll earn.
If you’re considering a low-risk investment, you may be wondering if CDs are worth your time in 2024.
Currently, the best CDs are paying 5.00% APY (annual percentage yield) or higher. And, contrary to popular opinion, you don’t need millions of dollars to invest. Most banks require only a minimum of $500-$1,000 to open a CD.
Still, recent high-profile bank failures are making investors nervous.
The question is: Are the failures a temporary response to economic conditions or will it cause CD rates to change significantly in 2024?
Here’s what the experts are saying and what it could mean for your investment strategy.
What Experts Are Saying About 2024 CD Rates
The Federal Reserve board met on May 1, 2024, and announced that federal interest rates would remain unchanged. The rate — between 5.25% and 5.5% — is at an unprecedented 23-year high. Fed chairman Jerome Powell cautions that inflation must cool considerably before lowering borrowing costs.
Generally, the federal funds rate is the interest rate banks pay to borrow from each other overnight.
A bank resorts to this overnight borrowing when the day’s deposits and withdrawals leave it without adequate cash to fulfill the Fed’s reserve requirements.
Prior to March 2020, the Federal Reserve set reserve requirements between 3-10% of a bank’s net transaction account balance. In response to COVID-19, however, the Federal Reserve reduced the reserve requirements to zero — and currently has no plans to change this.
Yet, despite zero reserve requirements, banks still borrow from each other to meet short-term liquidity needs.
In 2024, banks are passing on their high borrowing costs to consumers through record-breaking auto loan, mortgage, and credit card interest rates.
The good news is that increased interest rates keep CD rates high, which means consumers can earn more money on their investments.
With Fed chairman Jerome Powell indicating that further rate hikes are unlikely for the rest of 2024, most experts expect CD rates to fall slightly by Q4, to between 4.50% and 5.25%.
What Does This Mean for Investors?
CDs come with either fixed or variable interest rates.
If you invest in fixed-rate CDs, you’ll earn the same amount of interest for the deposit’s full term.
Investors with variable-rate CDs could potentially earn more if rates increase during the deposit’s term. On the other hand, they could earn less if interest rates decrease during the deposit’s term.
If you’re considering a CD investment, you may want to take advantage of the historically high rates in 2024.
A word of caution, however: CDs have early withdrawal penalties. The best way to avoid a penalty is to invest in no-penalty CDs. You’ll have the flexibility you want — if you’re open to slightly lower APYs than traditional CDs.
That said, most investors prefer fixed rate CDs.
Meanwhile, investors who are less risk-averse could choose a variable rate CD, where the rate fluctuates based on factors as the prime rate (the rate banks charge their most creditworthy customers) or Consumer Price Index (CPI).
For 2024, economic indicators suggest that a variable rate CD may be a risky choice. With interest rates at their highest and experts predicting a slight decrease in Q4, the potential for lower returns is a top concern.
But, there’s another way you can beat the market. Investing in a CD ladder will allow you to enjoy 2024’s higher-than-normal interest rates for a longer time — even if the Fed initiates a cut next year.
A CD ladder consists of investing in several CDs with different maturity dates. Here’s how to build out a CD ladder with a hypothetical $2,500 investment. At the base of your ladder, you’ll have a very short-term CD (a year). When your CD matures, you’ll reinvest the proceeds in a new CD.
You’ll do the same with every “rung” of your ladder. Each time a CD matures, you’ll re-invest the proceeds in a new CD. That way, you’ll always have a CD maturing every year.
A well-planned CD ladder could see you enjoying today’s high rates for up to five (5) years. So, you’ll earn high interest rates, even if rates fall later this year or the next.
Ultimately, you should always consider the bottom line. CDs are a better way of investing than keeping money in a savings account, in terms of interest earnings. However, they won’t double or triple your investment. If you’re already planning on investing in a CD, 2024 could be the right time to do so.
Why Do Interest Rates Increase?
Rate hikes usually work as the antidote to inflation. That’s why the Federal Reserve often uses rate hikes as a countermeasure against unchecked inflation. The Federal Reserve takes steps to decrease inflation when the rate of inflation rises above 2% in a single year.
With an unexpected surge in consumer prices in 2024, consumers are facing sticker shock at the pump and grocery store. That’s why the Fed instituted multiple federal fund rate hikes in 2023.
If banks have to pay more to do business, they’ll charge consumers more to take out loans.
A federal rate increase makes everyone, from banks to big businesses to households, think twice before making a purchase.
This helps reduce inflation.
Here’s how: It’s no secret that more consumers are using credit cards than ever. The Federal Reserve reports that credit card balances increased by $50 billion to $1.13 trillion in 2023.
Many credit cards have variable interest rates, and rate hikes cause those interest rates to increase.
This makes big-ticket purchases on a credit card more costly. Although some consumers who use credit cards will continue making purchases, the rate increase will stop others from doing so.
When there are fewer willing buyers on the market, the demand for goods decreases. When there’s less demand for the same amount of supply, prices decrease — thus causing inflation to fall.
On the other hand, a lack of rate hikes can lead to higher inflation.
Here’s an example: Many people began the process of refinancing or buying homes for the first time when mortgage rates were at historic lows in 2021. This resulted in a large number of buyers entering the housing market.
In turn, the real estate market experienced unprecedented growth in 2021 (up 16.9% from 2020). Even the least desirable homes fetched high prices.
With demand outpacing supply, many regions began to experience shortages because there were more buyers than available homes for sale. Record high home prices also led to higher than normal prices for commodities used in home construction (such as steel and lumber).
In short, higher home prices led to a broader inflationary environment.
Ultimately, the Federal Reserve will do what it takes to fight record inflation. And, in 2024, it expects to do this by keeping rates at near historic highs.
These high rates stand to increase interest rates for CDs, which could make CDs a more lucrative investment for savvy investors.
And, if your bank fails?
You’re covered for up to $250,000. The FDIC will either set up an account for you at another bank or send you a check. It’s a win-win scenario.
