The economy is changing, and it will likely impact savers. The July jobs report was not stellar, with only 73,000 jobs added. Moreover, the revisions to the May and June jobs reports resulted in a reduction of 258.000 jobs, showing a cooling job market. When this happens, one way the Federal Reserve can stimulate the economy and job growth is by lowering rates.
CME FedWatch projects an 86% chance of a quarter-point rate cut when the Fed meets in September. If this happens as projected, it will impact savings rates. When the Fed cuts rates, it also drops rates on all savings vehicles, from CDs to high-yield savings accounts.
With this in mind, if you're a saver who hates surprises, I have a tip for you. Doing this helps you earn guaranteed returns and lock in a high rate now before the Fed makes its next move.
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Lock in a high rate before rate cuts hit
CDs don't offer the ease of accessing your cash, like money market accounts or high-yield savings accounts. However, they do come with a feature that proves handy in situations like this: A fixed APY.
With a fixed APY, you won't have to worry about what the Fed does. Once you lock in your rate, it's the return you'll earn even if rate cuts happen.
Now is an excellent time to sign up for one, with rates above 4% for many accounts. Using this tool from Bankrate, you can shop and compare options fast:
Which CD term works best for me?
Your choice comes down to your savings goals and risk tolerance. If you have cash on hand and want to earn a high rate for years, our best 5-year CD rates are a wise option to consider.
For example, if you deposit $50,000 into a 5-year CD from Lafayette Federal Credit Union at 4.28%, you'll earn $11,655.97 in interest risk-free over the term.
If you’d rather see how inflation plays out before committing long-term, you might be more inclined to a short-term CD. These are beneficial if you want to see how prices play out for the next year, as you can move your money if inflation increases to the point where 4%+ returns are not netting you enough of a return.
This is where our best one-year CD rates come into play. Locking one in now ensures you receive a high rate that won't change if the Fed cuts rates.
Using the same deposit above of $50,000, if you sign up for a one-year CD with Colorado Federal Savings Bank at 4.30%, you'll earn $2,150 in interest that first year.
And, you have the option in a year to pivot to other investments that earn you more, especially if prices keep rising.
Things to keep in mind with this CD approach
CDs are a lock your money away and forget about it type of savings vehicle. If you need to access money before your term expires, you pay an early termination fee. Banks charge penalties based on your CD maturity. If you have a one-year CD, penalties range from three to six months of interest.
Meanwhile, for five-year CDs, penalties can creep as high as one year of interest earned. Therefore, make sure you can live without this money comfortably before you sign up.
Also, some banks will renew your CD once it reaches its maturity. Set a reminder on your phone a week before its maturity date, as it gives you more time to shop around to see where rates are and whether you want to try another savings vehicle.
Ultimately, CDs are a smart savings option if you want to lock in a high rate now and not worry about upcoming rate cuts. Not only will you receive a guaranteed return, but you will have peace of mind knowing your CD is outpacing inflation.
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