Fed announcement means CD rates have likely peaked

Jun. 13—LIMA — Federal Reserve officials said Wednesday that inflation has fallen further toward their target level in recent months but signaled they expect to cut their benchmark interest rate just once this year.

According to The Associated Press, the policymakers' forecast for one rate cut was down from their previous projection of three cuts. That's because inflation, despite having cooled in the past two months, remains persistently above their target level.

An Ohio Northern University professor believes the Fed's announcement is a signal that high interest rates on certificates of deposit that had soared to 5% or higher in recent months are unlikely to continue for long.

"With Jerome Powell stating that a single rate cut is likely this year, it is extremely unlikely that CD rates will continue to rise, so locking in the existing rates at various maturities prior to lower rates being introduced is a wise decision," said David McClough, professor of economics at Ohio Northern University.

Earlier this month, McClough suggested that rates being offered for certificates of deposit had probably already hit their zenith.

"Rates have almost certainly peaked. While the bond market bounces around by 25-50 basis points, banks aren't going to take any chances. Rates are expected to decline, not rise," he said.

In recent months, high yields were being widely offered on short-term obligations, with six- or eight-month CDs earning a higher interest rate than those with longer maturity dates.

"Interest rates reflect inflation expectations," McClough said. "Longer term rates indicate that market participants expect rates to decline long-term because the expectation is that inflation will moderate soon and remain low for years."

Greg McBride, chief financial analyst for Bankrate.com, a personal finance website, said in a story earlier this month that the hike in CD rates is best explained as supply and demand.

"The Federal Reserve has been raising interest rates to combat inflation, which in turn is making debt more expensive," McBride wrote. "Banks can make more money on loans, but they need deposits to make those loans. If you want more deposits, you entice people by offering better interest rates."

Even if CD rates are not expected to climb, certificates of deposit remain a preferable option to low- or no-interest savings accounts, McClough said.

An online search of CD rates on Thursday, the day following the Feds' announcement, showed yields of 5% and higher were widely available.

"CDs can be prudent investments, but each individual faces various constraints and embodies certain preferences," McClough said. "If liquidity is not an issue and you expect rates to decline, then locking up a CD today with a rate above alternatives in the future constitutes savvy investing. If, however, rates are rising, then locking in a rate is not prudent."

The economist said the decision on whether to invest in certificates of deposit vs. paying off existing debt varies with circumstances facing individual consumers.

"The balance in a no-interest account buys less every single minute of every day, so the funds should be used for any other purpose," McClough said. "Paying debt makes sense if the rate is higher than the alternative CD rate. The difference is added gain to the payer. Sometimes liquidity preferences justify the 'loss,' so each person must decide."