Mention the term CD to a generation of day-traders and cryptocurrency enthusiasts, and you may invoke visions of their parents’ dusty 1990’s music collection. CDs (the financial kind, not the music kind), however, are still a worthwhile consideration for short and long-term investment strategies.
CDs, or certificates of deposit, exist as an agreement between the depositor and the financial institution. In this agreement, the depositor agrees to give a certain amount of money to the bank or credit union which, in turn, agrees to pay back that amount after a fixed period of time, plus interest. CDs are considered safe investments because they are FDIC-insured up to $250,000 per depositor. However, unlike savings accounts, CDs are not liquid assets and the agreed upon interest rate is fixed, regardless of external market influences. Furthermore, the invested funds are not accessible to the depositor before the end of the investment timeline without incurring some hefty fees.
It’s not hard to see why CDs have fallen out of the periphery of today’s savvy investors. After the financial crisis of 2008, and even more recently post-pandemic, interest rates on investments of six-month, one-year and five-year CDs all fell below one percent, a far cry from the historic highs of the 1980s which saw peaks of over 11 percent, but also a much higher inflationary period. Since then, the annual percentage yield (APY) for CDs saw a steady decline as the Fed lowered interest rates at various points over the decades in order to stimulate the economy. Recently, we have seen a reverse of that tactic. Between March of 2022 and July of 2023, the Fed has increased interest rates a record 11 times to combat inflation. While these interest rate increases meant that banks were charging more for loans, they also extended to interest rates for various investment vehicles and savings products which are now yielding slightly higher returns.
Since CDs are impacted by the movement of the federal fund rate, it is difficult to predict whether 2024 will see continued increases in the APY, or if they may have leveled out for now. The expectation is that rates will hover between five percent and 5.5 percent, to manage inflation. This is according to the September 2023 meeting minutes from The Federal Open Market Committee (FOMC), which helps to set monetary policy and influences the federal funds rate. As in the case with any investment considerations, it is always a best practice for the investor to do their own research and seek the advice of industry experts.