CD rates have fluctuated quite a bit in the first half of 2019. We entered the year fresh from the December 2018 Fed rate hike, a move that many experts had questioned at the time. A seven-month pause in Fed policy followed, with savers eagerly watching economic data and reading up on Fed commentary to see whether the central bank might raise or cut rates as its next move.
We got our answer at the Fed July meeting, when the Federal Open Market Committee (FOMC) announced its first interest rate cut in over a decade. The cut was minimal — only 25 basis points — but a change in policy has an almost immediate effect on many of the financial products we use every day. Read on for our outlook on what the Fed rate might do in the second half of 2019 and how that might affect CD rates moving forward.
The Fed rate outlook in 2019
When the July rate cut was handed down, speculation turned to whether further rate reductions were coming or if it was a one-off event. Only time and economic data will tell, but for now it looks as if the July rate cut will not be followed up by more reductions.
FOMC Chair Jerome Powell said that overall, the U.S. economy is doing pretty well, despite a slight, but expected, slowdown in growth. Instead, Powell described that rate cut as a hedge against “downside risks” from weak global growth, trade policy uncertainty and muted inflation.
On the question of whether we should expect more rate reductions this year, Powell stressed that rate cut cycles “go on for a long time,” and that the Committee is “not seeing that” as a possibility now. So from the perspective of July, the FOMC isn’t anticipating a string of rate reductions to come, something we’ve historically seen from other mid-cycle rate cuts like this one.
CD rate forecast: What we can expect from CD rates in 2019
It’s safe to say that CD rates continue to back away from the ten-year highs seen earlier this year. Over the first six months of 2019, as the FOMC hit pause, banks and credit unions were already slowly trimming rates lower. More recently, we saw widespread CD rate cuts after Powell merely indicated in a June speech that the FOMC was open to rate cuts.
After the Fed’s July move, you can expect another wave of CD interest rate reductions across the board. “Many of these rate leaders have been cutting their CD rates,” said Ken Tumin, founder of DepositAccounts.com — both MagnifyMoney and DepositAccounts.com are owned by the same parent company, LendingTree. “I think that will continue. Further, the cuts seem to be affecting both 5-year and 1-year accounts hardest.”
Even if the Fed returns to policy stasis over the next few months, we already know that banks and credit unions could continue a gradual lowering of their CD rates, given their behavior during the long pause in the first half of 2019.
Fed watchers are not dismissing the chance of another rate cut as soon as September. This hinges in part on global trade negotiations — one of Powell’s frequently cited risks to the outlook. A return to rate hikes would be the only driver for CD rates increases. That possibility is likely not in the cards for now.
CDs vs. savings accounts
Given the bleak outlook for CD rates in 2019, are CDs worth opening anymore or should you turn to savings accounts?
Tumin predicted back in January that savings account rates would continue their upward trend in 2019, potentially reaching rates of around 3% by the end of the year. Today, most of the top savings account rates are falling between 2% and 3%.
The best 5-year CD rates, however, are hovering around 3%. So while you might have missed the latest rate hike, CD rates are still offering solid savings opportunities. Opening a 5-year CD now would allow you to lock in relatively good rates for the next five years and protect your savings against any further rate cuts.
Then again, opening a 5-year CD now would also prevent you from taking advantage of the possibility of higher rates. Luckily, 1-year CDs aren’t that far behind, which eases the time commitment for your money. If you’re comfortable with a slightly lower rate today and still hold out hope for higher rates in a year, a 1-year CD could be the right move.
No-penalty CDs are another great option in times of rate uncertainty like these. Unlike a traditional CD, no-penalty CDs allow you to withdraw money and/or close your CD before its original maturity date without triggering a penalty. Typically, these penalties set you back a few months’ worth of interest earned. A no-penalty CD would allow you to easily switch accounts in case of rate changes.
Despite an overall healthy U.S. economy, “the labor market has clearly slowed, manufacturing is soft and investment is weak,” writes economist Tim Duy. The ongoing trade war between the U.S. and China has only worsened since the Fed’s August rate cut. This will be a central concern for the September FOMC meeting.
That said, even moderate improvements in economic data and the global trade environment would likely prompt the Fed to hold rates steady in September. CD rates could still gently decline on another Fed rate pause.
“I think it makes sense to allocate more of your savings into mid-term and long-term CDs rather than savings accounts and short-term CDs,” writes Tumin. “I don’t think 3% CDs will be around for much longer.”
If you’re on the fence about whether you should lock in rates now or not, consider a CD ladder. A CD ladder involves opening multiple CDs at the same time, ranging between short-, mid- and long-term accounts. The shorter-term accounts will allow you to take advantage of rising rates, while your long-term CDs — already earning at today’s high rates — will protect those funds from falling interest rates.