Why You Should Hope CD Rates Don't Go Higher


A person walking down the street with a grocery bag while reading a receipt.
A person walking down the street with a grocery bag while reading a receipt.

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When you're investing, as a general rule, it's a good thing to get a better return on your money. But rules don't always apply universally. In fact, certificate of deposit (CD) investors should absolutely not hope for yields to continue climbing, even though that would mean they could earn a better return on their money without taking on any additional risk.

Here's why you don't want better rates -- even if you want to invest in a CD and earn as much as you can by doing so.

You don't want CD rates to go higher for one simple reason

There's a very simple, yet important, reason why you absolutely shouldn't want CD rates to climb: Rates don't just go up for no reason. CDs have not offered yields near record highs in the post-pandemic era because banks just decided they wanted to give out extra money. The reason rates have gone up is because the Federal Reserve (America's central bank) has repeatedly raised interest rates to try to combat inflation.

Inflation is the increased cost of goods and services. Prices have been increasing more year over year in the post-pandemic era than they have for decades. The Federal Reserve is trying to slow these cost increases by raising rates and making money harder to come by. Banks, in turn, are offering better yields to attract customers in this high-rate environment.

It's not economic growth or positive economic conditions that have made it possible for you to get such a great yield on a CD (or even on a high-yield savings account). It's the efforts of the central bank to stop out-of-control price increases that are hurting people's pocketbooks.

Higher CD rates would likely mean another inflation surge

Early on in 2024, the Federal Reserve projected that it would cut rates multiple times this year, but inflation has remained stubbornly above its 2.00% target rate. As a result, the Fed has kept rates the same throughout the first half of 2024. It is now forecasting one rate cut for later this year -- and there's no guarantee rates will drop at all.

As long as rates stay stable, the yields offered by CDs are unlikely to keep climbing. With the Fed hoping to reduce rates, it is also very unlikely to increase them unless dire economic conditions force this move.

Basically, this means that unless inflation gets worse than its current levels -- which already aren't great at 3.3% in May and 3.4% in April -- CD rates will probably stay about where they are or maybe even start to drop in anticipation of that coming rate reduction. A rise in rates, therefore, would mean price increases had accelerated again.

When prices go up quickly, it hurts your ability to save money and buy a CD in the first place. So much more of your cash will go toward covering necessities that you may not have extra to invest. Any money you have saved anywhere that's not earning at least the current inflation rate is also going to lose buying power.

You don't want these outcomes, so don't hope for higher rates. Instead, take advantage of the unprecedented yields available right now by purchasing a CD if you have money you won't need for a while. Then, keep your fingers crossed that inflation will slow, the Fed will cut rates, and CD yields will drop in the future.

Your rate will be locked in for the duration of the CD term if this happens, so you'll earn the promised return (if you leave your money in the account until that term is up). And lower inflation should mean getting a little financial relief.

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