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Should You Invest in CDs Before Interest Rates Peak?

After several post-recession seasons of pretty-much-zero interest rates on certificates of deposit, recent years have been marked improvement. That's thanks to the federal funds rate, which the Federal Reserve has raised nine times between December 2015 and December 2018.

The national average rate for one-year CDs jumped from 0.33% APY in January 2017 to 1.01% in May 2019, according to Bankrate data. Even higher interest rates in the range of 3-3.15% are not uncommon for many major banks, according to Bankrate's rate roundup, although higher rates are sometimes tied to deposit minimums. But those higher interest rates may not stick around.

No Federal Reserve rate increases are anticipated for 2019. Some badysts anticipate the Fed will actually reduce rates this year, according to the Wall Street Journal; word from the Fed is that cuts are not likely.

Is it time for you to record CD before these top rates go away?

First, a quick CD refresher: a certificate of deposit is a short-term loan you provide a bank. In exchange for the privilege of clutching your dollars for six months, a year, or longer, the bank pays you interest. There are also no-penalty CDs, which allow you to withdraw your money at any time, but interest rates and minimum deposits for these can vary.

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CDs are typically recommended for short-term savings goals. If you're saving up for a big purchase in a few years, parking your money in an FDIC-insured CD can prevent the temptation of spending for that duration while earning just a smidgen of interest.

If you could benefit from a few extra bucks provided by interest and a CD was already on your shortlist of options, now's a good time to get one. But if you would rather have cash on hand, still-decent rates will likely be available in the next year or so.

Take a look at the last two times the federal funds rate dipped significantly (2000-1 and 2007-8) and you'll see the reductions took place incrementally, rather than in one fell swoop. Yes, some slides are more noticeable than others (see December 2007 to May 2008). But unless an economic meteor hits, we're not going to drop from 3% interest to 0.25% interest on CDs in a one-month span.

If you want your money out of sight and out of mind for a few months, a CD is a solid option right now. But there's no need to scramble to sign up just for the fear these rates are fleeting.

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