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A lot of people are taking advantage of today's outstanding 5% CD rates . And you may be eager to open a CD to benefit from them as well.
But if that's the case, you may want to get moving. I expect CD rates to drop before the end of the year. I even think we may be looking at lower rates as early as September. But that's also not a terrible thing.
Why CD rates are likely to fall soon
The Federal Reserve spent much of 2022 and 2023 raising its benchmark interest rate in response to high inflation. Currently, that benchmark interest rate is sitting at a 23-year high.
But since inflation has been cooling, albeit slowly, there's pressure on the Fed to start lowering its benchmark interest rate. Once that happens, CD rates are likely to follow suit, just as they rose in line with the Fed's interest rate hikes.
The Fed is next set to meet in mid-September. Following that meeting, we could see the first rate cut of many from the central bank.
And so not only do I think CD rates will fall before the end of 2024, but I actually think they'll fall before the end of September. However, there's a silver lining there.
The upside of falling interest rates
Lower CD rates aren't so awesome for savers. But a rate cut is good news for people who need to borrow money or who owe money on variable-interest debt, like credit card balances.
Right now, people who owe money on credit cards are paying more interest because of current conditions. And those shopping around for an auto loan or mortgage are looking at higher borrowing rates that could drive their monthly payments up.
While rate cuts aren't wonderful for people with money in the bank, they're a great thing for many consumers. And if you're someone who's looking to open a CD but also sign some type of loan in the near future, know that what you lose out in one regard, you should gain in another.
Even though CD rates are likely to fall before the end of the year, that doesn't mean they're going to plunge. You may not be able to lock in a CD with 5.00% APY past September. But that doesn't mean the best rate you'll be looking at in October is 3.50%.
Just as the Fed is likely to implement slow rate cuts, so too are CD rates likely to fall slowly. And getting a 4.50% APY instead of 5.00% isn't terrible. For a 12-month term and $5,000 deposit, you're talking about earning $225 instead of $250.
Of course, if you want to lock in a CD before rate cuts happen, your best bet is to take action in August. Banks may start to lower their CD rates ahead of the Fed's September meeting in anticipation of a rate cut. But don't panic if opening a CD in August is not in the cards. Rates should decline gradually.
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