Which CD term is the most beneficial ahead of rate cuts? Savings experts weigh in

In recent years, certificate of deposit (CD) accounts have provided savers with predictable returns and attractive annual percentage yields (APYs). During this time, the Federal Reserve has been working to fend off stubborn inflation, keeping the federal funds rate relatively high, despite rate cuts in 2024 — and that has helped keep CD rates elevated. 

While the elevated rate environment has been a drawback for borrowers, it’s been a benefit to savers, many of whom have scored high interest rates as a result. Those who put their money into CD accounts have capitalized on the high-rate environment by locking in a competitive fixed rate. But with uncertainty at the forefront of the economic landscape, CD rates have inched downward at points recently. 

And, as the year goes on, there may be further CD interest rate cuts in tandem with potential Federal Reserve rate cuts. While the Federal Reserve is taking the path of “wait and see” and is unlikely to make any changes at the June meeting, there are still hints of further rate cuts later in the year. Before any rate cuts occur, though, savers can lock in the best CD rates available now, but if you plan to do that, it’s important to choose a CD term that’s most beneficial for your situation. 

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Which CD term is the most beneficial ahead of rate cuts? Experts weigh in

During these uncertain times, CD accounts can be a refuge where you lock up funds for a specific term and a fixed interest rate. That way, you get stability and know exactly what you’re getting into, so long as you hold on until maturity and avoid early withdrawal penalties. 

“CDs have no surprises…So if consumers are very risk-averse and they just want to save without a whole lot of stress, CDs are excellent options,” says Dr. Lakshmi Balasubramanyan, associate professor of banking and finance at Case Western Reserve University.

One of the most important decisions is choosing a CD term. Unlike a savings account that provides access and liquidity, CD funds should generally remain untouched throughout the term or savers will face early withdrawal penalties. So, CD accounts are generally a great option in addition to a high-yield savings account that houses your emergency fund. 

When choosing a CD account term, ask yourself if you can afford to live without those funds for that period. And, you should also weigh these other factors during the process, experts say: 

Short-term CDs: Best for high interest rates 

If you’re looking to maximize returns and get the greatest yield, the most beneficial CD term for you right now is likely a short-term CD, experts say. While you’d typically get higher returns with a long-term CD, that’s not the case in the current rate environment.

“From what I’ve seen, right now the best CD options that are offering the highest interest rates are the shorter-term CDs,” says Brittany Pedersen, director of deposit and payment operations at Georgia’s Own Credit Union.

Generally, CDs under the short-term umbrella have terms that are less than a year. So, for example, it makes sense to consider a 3-month CD, a 6-month CD or a 9-month CD. For short-term CD accounts, Pedersen says CD rates are around 4%. 

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Long-term CDs: Best for longer-term security and predictability 

If you have a solid emergency fund and want to put a portion of cash into a stable vehicle, a long-term CD may be worth looking into. Long-term CDs may have lower rates right now, relative to short-term CDs. But if and when the Federal Reserve has more rate cuts, there could be further drops. 

With a long-term CD, you can lock in competitive CD rates now with something like a 2-year CD or a 5-year CD.

“Even though the long-term CD rates aren’t the highest, they’re still pretty good, especially if you look at where CD rates have been over the past five to ten years. If people can afford to lock up their money in a longer-term CD, it’s a nice, safe way to save your money and just earn additional interest,” says Pedersen.

CD ladder: Best of both worlds 

You aren’t limited to opening just one CD account. You can open several CD accounts with varying CD term lengths for each account. For example, by mixing a 6-month CD, a 1-year CD, an 18-month CD, a 2-year CD and a 5-year CD, you can employ something referred to as a CD ladder. 

“CD laddering is a great strategy for savers who are looking to lock in great rates while remaining flexible in case better rates appear on the horizon. It also means you have some of your cash available to you at regular intervals in case you need access to your money,” says Shana Hennigan, chief business officer at Raisin, a savings marketplace. 

When you use a CD ladder, you have a combination of short-term and long-term CD terms. That way, you can have different maturity dates and take advantage of different CD rates. 

“As your CDs come due, you can decide to either reinvest in another CD or put your cash somewhere else like a high-yield savings account,” adds Hennigan.

The bottom line 

CD interest rates could be headed downward, but you can capture the most competitive rates now, ahead of any future rate cuts by the Federal Reserve. The most beneficial CD term for you, though, will depend on your goals. But whether you go for a short-term CD, long-term CD or a mix of both with a CD ladder, it’s important to do your research and shop around. 

“When speaking about where CD rates are now, it’s also worth noting that there can be huge differences in available rates depending on the bank or credit union you choose,” says Hennigan. “While it’s impossible to predict with certainty where rates will be towards the end of the year, now is still a good time to lock in an attractive rate.”

Before opening a CD account, look at the fine print and understand the early withdrawal penalties. If you’re looking for something more flexible, you can also look into high-yield savings accounts as an alternative or in conjunction with a CD. Note that savings account interest rates are variable, though, so the rate won’t be fixed like with a CD. Whatever route you choose, putting money away now in a high-rate environment can put your money to work for you.