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While elevated interest rates have slowed the housing market in recent years, they've been a boon for those with savings deposit accounts, including certificates of deposit (CDs) . However, the tides could be shifting due to a couple of key economic developments.
First, inflation is trending downward . According to the Bureau of Labor Statistics, the all-items index increased by 2.9% annually in July, marking the smallest yearly rise since March 2021. Second, as the inflation rate moves towards the Federal Reserve's stated target rate of 2%, the Fed is widely expected to lower interest rates at its meeting later this month. In fact, the CME FedWatch tool predicts at 100% the likelihood that the agency will cut the federal funds rate in September, with a 61% chance the cut will be by 25 basis points.
Any rate cut by the Fed could affect interest rates on deposit accounts like high-yield savings accounts and CDs . Yields are already beginning to adjust downward and could fall further. While it may be tempting to lock in a higher yield with a long-term CD, short-term CDs often offer even higher rates right now. Short-term CDs are savings accounts with terms lasting one year or less, typically three months, six months, or one year.
So with interest rates and inflation easing, is opening a short-term CD still worth it? Let's see what experts say about how a short-term CD could benefit you.
Don't miss out on the opportunity to open a high-rate CD. Compare your top CD account options here .
Short-term CDs are still worth opening, experts say. Here's why
"Even with a September rate cut expected, short-term CDs can still offer a compelling alternative for consumers versus a normal checking or savings account," says Christopher Stroup, a certified financial planner for Silicon Beach Financial. "For those consumers willing to sacrifice some liquidity for a higher interest rate, you can still expect short-term CDs to offer higher yields than comparable products like a high-yield savings account."
Many of today's best CD accounts offer rates over 5%. As Stoup mentions, earning a substantial yield may be worth locking in your rate. Keep in mind, though, that if you need to withdraw funds from your CD account before it matures , you could incur an early withdrawal penalty equal to a specific period of earned interest.
Short-term CDs also allow you to earn interest on the money you're saving for a specific shorter-term goal. For example, if you're saving cash for a down payment on a car in six months, opening a CD that matures during that time frame could help you earn interest without sacrificing your savings.
"CDs tend to be more appropriate for a very specific short-term goal with a clear timeline, as long as you are confident the funds won't need to be accessed early. That's why it's a good idea to ensure there's enough liquid savings elsewhere, such as a high-yield savings account, that can be accessed penalty-free at a moment's notice if needed," Eddy Jurgielewicz, a partner and lead financial planner at Upbeat Wealth, notes.
Find out the top CD rates available to you today .
Other alternatives worth considering
Currently, many high-yield savings accounts offer yields over 5% . CDs and high-yield savings accounts commonly offer higher rates than the average savings rate of 0.46% .
You might also consider purchasing Treasury debt, which is government-issued debt that typically offers interest rates comparable to CDs. Treasury bills, or T-bills, are a popular form of Treasury debt investments that are sold at a discount and mature in terms ranging from a month to a year.
"Treasuries are exempt from state and local income tax, and they are safe and backed by the full faith and credit of the U.S. government," Amanda Vaught, a financial advisor and owner of Propel Financial Advisors, says.
As a result, it's unlikely you'll lose your investment, just as FDIC insurance backs your CD deposits up to their limits.
The bottom line
Is opening a short-term CD worth it for you?
"As with most financial questions like this, it depends on your circumstances," says Vaught. "For a person who has short-term cash needs, a short-term CD may make sense. This could include cash savings for emergency savings accounts, or savings set aside for a near-term goal with a specific date in mind, such as a vacation or new home furniture."
If you are keen on opening a CD account, you might consider doing so before interest rates drop. If the expected Federal Reserve rate cut this month marks the start of a trend toward lower rates, locking in today's rate may make sense. Review the pros and cons of a short-term CD before opening your account, and make sure you use funds you're reasonably certain you won't need during the term.
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