The Federal Reserve plans to cut interest rates in 2024. Here’s how this affects CD yields:

The Federal Reserve surprised experts at its December meeting by calling for multiple interest rate cuts in 2023 as inflation cools. But what does this mean for certificate of deposit (CD) yields, which are currently at multi-year highs? Here’s a rundown of what the Fed expects, what this could mean for CDs, and some important things to keep in mind as we head into 2024.

The Federal Reserve expects several interest rate cuts in 2024.

The Federal Reserve decided to keep the benchmark federal funds rate steady at its December 2023 meeting, but the biggest story lies in the economic outlook the Fed released along with its decision.

Recent projections show that policymakers expect to cut the federal funds rate by three quarter points (0.25%) in 2024. This is a more aggressive pace of cuts than Fed members had previously called for.

To be clear, these are projection, and no one (not even Fed members themselves) has a crystal ball that can tell us what will happen. For example, in December 2021, the Federal Reserve projected that the federal funds rate would be 0.9% by the end of 2022. actually We ended 2022 with a target range of 4.25%-4.5%. Forecasts are simply the best estimates members can make based on currently available information.

What does the Fed mean about CD yields?

One important thing to keep in mind is that while CD yields overall tend to move in the same direction as the benchmark interest rate set by the Federal Reserve, directly relationship. In other words, even if the Fed cuts interest rates by 1 percentage point, there’s no guarantee that banks will move CD yields by exactly the same amount. However, a downward trend would be a wise choice.

It is also important to point out the different dynamics that govern short-term and long-term CDs. I don’t want to turn this into an economics lesson and will leave out the math problems involved. However, the general idea is that the yield on shorter maturity CDs (e.g. 18 months or less) is determined primarily by: Present Base interest rate situation.

On the other hand, the yield of long-maturity CDs is affected by future interest rate expectations.

To illustrate this, consider that at the time of this writing, there are one-year CD yields of up to 5.5% available from reputable financial institutions. On the other hand, the top five-year CD yield available as of December 2023 is 4.3%. This is the exact opposite of the historical norm. Generally, the longer you are willing to tie up your money, the higher the rate of return you can expect. The simple explanation is that prevailing interest rates are currently relatively high but are expected to fall significantly over the next few years.

conclusion

The simple explanation is that if the Federal Reserve cuts the federal funds rate in 2024 as expected, CD yields will likely be lower. However, there are some key principles to keep in mind.

• There is no guarantee whether or how much the Fed will actually cut interest rates. If economic indicators are trending in the wrong direction, there may be no interest rate cuts at all.
• There is no direct correlation between CDs and benchmark interest rates.
• No one has a crystal ball that can predict economic conditions, political events, or other factors that can affect interest rates.

With all this in mind, it may be a smart idea to put your money into CDs. nowIf you have idle cash waiting to be distributed. And regardless of what happens to overall CD rates in 2024, it’s fairly certain that you’ll get the best returns from online banks like the ones on our list of the best CD rates.

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