3 Reasons You Should Open a Long-Term CD Before the August Inflation Report
KEY POINTS
- If August's report continues the inflation trend, the Fed is likely to cut rates in September.
- Even without Fed changes, banks may see a strong report as a sign of future rate cuts and cut their rates in anticipation.
- Best-case scenario is rates stay the same, so no reason to wait if you want a CD.
If you've been contemplating CDs thanks to the current high CD rates, then you may want to hop off the fence and get moving in the next few weeks.
The U.S. Bureau of Labor Statistics updates the Consumer Price Index (CPI) each month. Nicknamed the Inflation Report, it follows trends in the prices of everyday goods that set the rate of inflation.
July 2024's Consumer Price Index showed a drop in year-over-year inflation, to 2.9% (it was 3.0% in June). If August's report -- due out Sept. 11, 2024 -- shows the same trend, this could have a big impact in the coming months.
1. There's a good chance the Fed cuts rates
The Federal Reserve is set to meet Sept. 17-18, 2024.
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At that meeting, one of two things will happen:
- Rates are decreased
- Rates stay the same
If August's inflation numbers are good, many people believe the Fed will cut rates at least 0.25% at that meeting. Some think a cut as high as 0.50% could be possible.
Now, this isn't a given. There are plenty of experts who think the Fed is more likely to hold out on rate cuts until inflation is closer to 2.0%. But no one knows for sure either way.
2. This is probably as good as rates are going to get
No matter what the Fed chooses to do, the best-case scenario for CD rates is that they stay the same. Because, while no one can agree on what the Fed will do, we can all agree that rates aren't going up.
In other words, if you've been holding out hoping for higher rates? I wouldn't hold my breath.
Indeed, even if the Fed does nothing, banks may still see a strong August CPI report as a sign of rate cuts to come. (The Fed's stated goal is 2.0% inflation.) Some may want a head start and pre-emptively cut their rates.
3. Sooner is better for compound growth
The magic ingredient to compound interest is time.
The sooner you get your money compounding, the more it will grow overall. If you know you want to use CDs to grow your savings, then why lose out on that extra time for growth?
If you're not sure, at least get a savings account
Now is a good time to open a CD if you're sure that's what you want to do. But this isn't necessarily something you can take back if you change your mind.
Most CDs have penalties for withdrawing your principal before the CD matures. At the low end, these eat into some -- instead of all -- of your interest. However, some CDs have penalties that can even eat into your principal.
Going with a high-yield savings account could be a good compromise. While you won't lock in your rates like a CD, you won't lock in your money, either.
Our Research Expert
Brittney is a data-obsessed finance nerd whose personal credit card collection is in the double digits. She has been sharing personal finance advice with readers since 2016.
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