CD Investors Are in for a Rude Awakening. Are You Prepared?

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Inflation has been a major problem for all of us in recent years. So if you're tired of paying more for groceries , utilities, and just about everything else, you're not alone.

But one positive thing to come from inflation is that the Federal Reserve took action to fight it by raising interest rates. And while that's led to higher costs for borrowers, it's been great for people with money in the bank.

Ever since the Fed began its rate hikes, savings account and CD rates have increased. In fact, it's been fairly easy to find a 5% CD for well over a year now. And that's given savers a prime opportunity to score a great return on their money without much risk.

But if you're hoping to see those 5% CD rates continue, here's some bad news. The Fed is expected to start lowering interest rates in mid-September. And to be clear, we're not talking about a one-time rate cut. Rather, the central bank will probably move forward with a series of interest rate cuts that extend well into 2025.

Just as the Fed's interest rate hikes drove CD rates up, so too are cuts likely to bring CD rates down. If you're interested in opening a CD, your best bet is to get moving now .

However, you should also know that there will be plenty of opportunity to lock in a good CD rate beyond September. There's no need to panic if you're not quite ready to commit to a CD.

What to expect from CD rates

It's pretty reasonable to assume that 5% CD rates will be off the table soon. As it is, many banks have already lowered their CD rates ahead of the Fed's expected rate cut announcement this month. And once that rate cut becomes official, CD rates could fall even more.

As the Fed continues to cut rates, CD rates are likely to follow suit. So it's fair to say that we may reach a point in 2025 when CD rates fall below 4%.

At the same time, any decline in CD rates that comes down the pike is likely to be gradual. So while you may be looking at 4.50% CDs in the coming months, there's a good chance that CD rates will manage to stay at or above the 4% mark for a good part of 2025. Rather, it's that as the new year progresses, there's the risk of CD rates going below 4%.

That said, it's important to recognize that today's CD rates are notably high. It's hard to wrap your head around the idea of a 3% return on a CD when it's been possible to get 5% for such a long time. But historically speaking, 3% isn't actually a bad rate. That's something you'll want to keep in mind as rates begin to slide.

The news isn't all bad

It's disappointing to imagine the days of 5% CD rates coming to an end. But remember, once the Fed starts lowering rates, it's not just CD rates that are likely to fall. Borrowing rates should fall as well.

This means that by this time next year, it could be a lot cheaper to sign a mortgage or finance a car purchase. What you might lose in the form of a lower interest rate on a CD, you could gain in the form of lower loan payments.

Of course, if you have the money on hand to open a CD, then you might as well do so as soon as right now to take advantage of where rates are today. But remember that there should still be opportunities to score a decent return on a CD for many months beyond September.

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