They might — but don’t expect too much.
- CDs have paid minimal interest for years.
- The Federal Reserve’s plans could send CD rates higher this year.
The money you have earmarked for near-term expenses or emergencies should sit in a savings account. But if you have extra money on hand you’re not ready to invest, a certificate of deposit, or CD, could be a good place for it.
The upside of CDs is that they tend to pay higher interest rates than savings accounts. The downside, though, is that they require you to lock your money away for a preset period of time. That time frame could be six months, one year, or longer. If you cash out your CD before it comes due, you could be charged a penalty fee equal to several months of interest.
In recent years, CDs have been paying really low rates, making them a less appealing option. But this year, CD rates could rise — albeit modestly — for one big reason.
It’s all about the Federal Reserve
The Federal Reserve recently announced its first of several interest rate hikes of the year. Since the Fed intends to raise its federal funds rate several times this year, consumer interest rates are expected to climb.
Now just so there’s no confusion, the Fed is not in charge of setting consumer interest rates, like mortgage rates, credit card rates, and CD rates. Rather, those are set by mortgage lenders, credit card issuers, and banks, respectively. However, the actions of the Fed tend to have an influence on consumer interest rates, so CD rates have the potential to rise.
But whether they rise significantly is another story. And most likely, that won’t happen.
Right now, you might snag a rate of 0.70% on a one-year CD. As 2022 progresses, we could see one-year CD rates inch closer to 1% or maybe even hit that mark. But is that much to write home about? Not really.
That’s why you shouldn’t rely on a CD as a decades-long savings tool. If you have money you think you might need in a couple of years, it’s not a poor choice to put it into a short-term CD. But you shouldn’t, for example, house your retirement savings in a CD, even if rates do rise. Doing so could mean stunting your savings’ growth.