Are the Days of 5% CDs Numbered?

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If you like the idea of earning a risk-free 5% return on your money, then you may be inclined to open a CD.

And I'd tell you that's probably a good idea, provided you've made sure you don't need that cash for your emergency fund and are only looking for a short-term place to put it (for longer-term savings goals, investing your money in stocks is usually a more lucrative bet).

But while it's pretty easy to find a CD offering 5.00% APY today, it's hard to know whether that will be the case for much longer. While I certainly don't have a crystal ball, I do have reason to believe that CD rates will fall before the end of the year.

Why CD rates are bound to decline

It's a big myth that the Federal Reserve is in charge of setting CD rates. Banks set those, but they base their CD rates on the federal funds rate, which the Fed does oversee. The federal funds rate is the rate banks are subject to for overnight borrowing.

Since the Fed raised its benchmark interest rate several times in 2022 and 2023 as part of its effort to cool inflation, CD rates were able to take off and are now sitting at an attractive level. Once the Fed starts cutting its benchmark interest rate, CD rates are likely to start falling.

When will the Fed make its first rate cut? It's hard to know.

The central bank is next scheduled to meet on July 30 and 31. Some experts are convinced it won't cut rates later this month because there hasn't been enough progress with inflation. But because that meeting is set to take place, it's possible that a rate cut will indeed arrive very soon. If not, the Fed's next opportunity to cut rates is mid-September.

Either way, the Fed has made it clear that it's looking to start cutting rates in 2024. So whether that happens in July, September, or later, the fact of the matter is that once an initial rate cut takes place, CD rates are apt to start falling.

This doesn't mean CD rates will plunge the minute a rate cut is announced. But shortly after an initial rate cut, it's possible that we'll see APYs fall below 5.00%. If you want that 5.00% CD, now's the time to lock it in.

Don't panic over lower CD rates

Perhaps you want to snag a 5.00% CD while you can, but you just don't have the money right now. Maybe you were planning on a $1,000 CD but just used that cash to fix your car.

If that's the case, don't panic. As I said earlier, we're most likely not talking about a situation where CD rates are going to go from 5.00% to, say, 3.75% overnight. Just as the Fed will probably cut its benchmark interest rate gradually, so too should CD rates fall in a similar pattern.

Also, CD rates won't necessarily fall the minute the Fed announces a rate cut, either. You're not doomed if that CD isn't in place by July 31.

Rather, my advice is to lock in that CD by July 31 if that works for you. If you have the extra money in your savings account now, move it over. But if not, go by whatever timeline works best.

Remember, if CD rates fall from 5.00% to 4.75%, you're probably not talking about losing a lot of money. A 12-month, $1,000 CD paying 4.75% APY instead of 5.00% will earn you $47.50 in interest instead of $50. So while it's OK to chase the highest rate if you have the money lying around, don't stress yourself out needlessly, either.

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