Yahoo Movies How To Invest in CDs as Fed Continues To Raise Interest Rates
If there’s an upside to the Federal Reserve’s aggressive interest rate hikes this year — other than their potential to ease inflation — it’s that interest rates for savings accounts are rising as well. That includes certificates of deposit (CDs), which typically offer higher returns than regular savings accounts.
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The difference with CDs is that when interest rates are rising, you need to strategize a little more to maximize your returns. This means not only shopping around to find the best rates, but deciding which kind of CD to invest in, and for how long.
The Fed has raised interest rates a total of 3 percentage points so far in 2022, CNBC reported. That includes last week’s 0.75% hike — the third such increase in a row. Some economists expect the Fed to hike rates by at least another percentage point by the end of the year.
One result is that yields on CDs have been climbing toward 3% across various maturities after lagging below 1% earlier in the year. According to Next Advisor, the average annual percentage yield (APY) on a one-year CD term is currently 2.87%. For three-year terms the average is 2.94%, and for five-year terms the average is 3.21%.
Those are the highest yields in years, and for that you can thank the Fed’s rate hikes. The question is: Should you go ahead and get a CD now, or wait until the Fed’s next interest rate hike, when yields might go even higher?
In an Augusta interview with Forbes, Ken Tumin, founder and editor of DepositAccounts, said the highest yields for five-year CDs could hit a range of 4.00% to 4.50% by the end of 2023, based on the expectation that the Fed would hike rates a total of seven times this year and three or four times next year. CD yields could even go as high as 5.00% in 2023 if the Fed remains aggressive and hikes rates more than expected.
“If you’re worried about being locked into a low-rate CD if rates start rising, choose long-term CDs with early withdrawal penalties of no more than six months of interest,” Tumin said.
CDs that come with reduced or no withdrawal penalties let you move your money elsewhere with little financial pain should yields increase in the coming months. Some banks and credit unions also offer add-on CDs that let you invest a certain amount now at one interest rate, with the option to add more money at a later date at the same rate.
If you’re determined to go ahead and open a CD account now, with yields already at their highest in years, take the time to scout out the best rates.
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“Investors who want to get the highest rate possible on a bank CD should look beyond national averages and shop around for the best rate,” Kevin Mirabile, a professor of finance and business economics at Fordham University’s Gabelli School of Business in New York, told Forbes.
Here are some of the best CD rates by term and bank this week, according to Next Advisor:
1-Year
CFG Bank: 3.20%
Sallie Mae: 3.05%
Ally Bank: 3.00%
3-Year
Bread Savings (formerly Comenity Direct): 3.55%
CFG Bank: 3.50%
Sallie Mae: 3.30%
5-Year
Bread Savings (formerly Comenity Direct): 3.65%
CFG Bank: 3.60%
Synchrony Bank: 3.50%
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This article originally appeared on GOBankingRates.com: How To Invest in CDs as Fed Continues To Raise Interest Rates
