3 big reasons to open a CD account before the holidays
Over the past couple of years, putting money in an interest-bearing account has led to substantial yields for savers. But with the Federal Reserve's recent rate cuts, these high yields are starting to cool.
With a new administration taking office in January, fiscal policy could further change and influence yields on deposit accounts like certificates of deposit (CDs) and high-yield savings accounts (HYSAs). And, upcoming inflation data and job market changes could also affect how rates move in the near future.
Given this evolving rate environment, now might be an opportune time to consider opening a CD account to secure a good rate before any changes occur. It could be wise to make your move before the holidays, as banks might adjust their yields in response to market shifts. Here's why.
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3 big reasons to open a CD account before the holidays
Let's explore the key reasons to consider opening a CD before the holidays.
Rates could drop in 2025
According to its September meeting minutes, the Federal Reserve anticipates a reduced end-of-year interest rate and lower rates in 2025. The Fed then lowered rates at its November meeting by 0.25% and, if the agency's expectations are correct, we should see lower rates next year, potentially influencing CD rates.
"With interest rates likely to decrease in 2025, there's a case to be made for locking in favorable rates through a certificate of deposit sooner rather than later," says Jason Gilbert, founder and managing partner of RGA Investment Advisors. "The Federal Reserve's anticipated rate cuts, driven by cooling inflation and a slower economic outlook, may reduce yields on savings products in the coming year. For savers seeking stability and willing to forgo liquidity, CDs can offer the benefit of a fixed rate over a set term, providing predictable returns that can be appealing in a declining rate environment."
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CD rates are still high
Fortunately for savers, CD rates are still high, especially compared to historical norms. Average yields on 3-month CDs hovered below 1.00% in 2020 but climbed to 5.32% to close out 2023, according to data from the Federal Reserve Bank of St. Louis. While rates have cooled somewhat in recent months, you can still secure a top CD account with rates in the mid-4% range. This enables you to secure attractive rates before the holidays, and any shifts in the economic landscape take place.
Dean Lyman, founder and CEO of Your Financial Partnership, says CDs present a good opportunity for savers with rates notably higher than historical averages.
"My advice is to carefully consider your financial goals and risk tolerance. If you have funds you won't need immediate access to and want to secure a predictable return, a CD could be a very suitable option in the current landscape. It's also wise to ladder CDs with different maturity dates to balance liquidity needs and potential rate changes," Lyman says.
Rates are more reliable than alternatives
Perhaps the biggest downside to CDs is that you must keep your funds in your CD account to lock in the fixed rate. But if you have funds you can afford to leave in an account over the longer term, it could be worth it. In today's rate environment, having a fixed interest rate is exactly why a CD might be a better choice than other savings options, especially high-yield savings accounts.
"Differences between various short-term instruments are somewhat marginal, but HYSAs tend to move more quickly to match prevailing rates on the descent than they do when rates are increasing," Eric Johns, co-founder and lead planner of Equilibrium Financial Planning, says. "This causes me to recommend clients pursue CDs or money markets since money markets are more responsive, and CDs guarantee the yield at the time of purchase."
The bottom line
Should savers open a CD account before the holidays? With rates trending downward, savers may be wise to lock in a CD rate now before rates fall further. By doing so, you might be able to take advantage of bank promotions offering higher yields to incentivize you to save at a time when you're spending more money than usual.
Gilbert, who also recommends treasuries right now due to their current high yields, sees the benefit of opening a CD account now.
"Given that today's CD rates are also relatively favorable, individuals seeking a guaranteed return might act before the holidays, but it's essential to weigh the liquidity constraints of CDs," Gilbert says.
