Understanding how the Federal Reserve’s monetary policy decisions affect your interest income over time is key to making informed decisions about investing your money. With another rate cut likely this week, certificates of deposit (CDs) may be your best bet.
Fixed deposits are a smart move to guarantee stable returns, especially if interest rates are expected to fall in the near future. That’s why you might want to consider opening a CD before the next Fed meeting.
A CD is a type of bank account that requires you to deposit funds for a set period of time (called a term). CD terms can range from a few months to a few years.
In exchange for keeping your funds tied up, a CD pays a fixed interest rate throughout the term. CD interest rates are typically higher than those on regular savings accounts. Once the CD matures, you can withdraw your original deposit plus accrued interest.
Read more: Fixed vs. Floating Rate: What’s the Difference and Why Does It Matter?
The federal funds rate is the target interest rate set by the Federal Reserve. It determines the interest rate at which banks borrow funds from each other overnight to meet reserve requirements.
The federal funds rate is expressed as a range, currently 3.75%–4%. Banks negotiate specific interest rates within this range.
The Federal Reserve uses the federal funds rate as a tool to curb inflation. When inflation is high, the Fed raises its target interest rate, making borrowing more expensive, which dampens consumer spending and helps lower everyday costs. When the economy needs a boost, the Fed may initiate a series of interest rate cuts to encourage more spending and borrowing.
Read more: Look at the federal funds rate over the past 50 years: How has it changed?
Changes in the federal funds rate have a significant impact on financial institutions and the economy as a whole. But these decisions can also impact your bottom line.
Although the Fed’s interest rates do not directly affect the interest rates individual banks set on consumer deposit accounts and loans, they are closely related to each other. For example, when the Federal Reserve raises interest rates, interest rates on deposit products, including savings accounts and certificates of deposit, also tend to rise. When interest rates fall, deposit rates usually fall.
The Federal Reserve will meet again on December 9th and 10th to decide whether to adjust the federal funds rate. At its last meeting, the Committee lowered its target range for the federal funds rate to 3.75%–4%. Experts believe the Fed will cut interest rates again after this week’s meeting.
Read more: When does the Fed meeting take place?
If the Fed does decide to lower the federal funds rate again this week, CD rates will soon begin to fall. However, if you open a CD within the next few days, you’ll lock in today’s higher rate and continue to earn the higher rate even if deposit rates drop.
Even so, we can’t be sure what will happen. So while you wait for the Federal Reserve’s official announcement on how interest rates will change (or stay the same), this might be a good time to evaluate where you currently hold your savings and consider opening a new certificate of deposit.
If the Fed decides to keep rates on hold, there will be no direct impact on deposit rates, meaning now is the perfect time to open an account and take advantage of historically high interest rates. As things stand, the best CD rates right now are hovering around 4% or higher.
But if the Fed does decide to lower rates, now may be your last chance to lock in today’s competitive CD rates.
