Why short-term CD Rates Are higher than long-term right now

Make this Smart Money Move Today (before it’s too Late!)

Many of my readers have been asking me what’s going on with CD rates? “Why are the highest rates for the shorter time periods?” they wonder, expecting it to be the opposite.

Let me explain…This year hasn’t been a particularly great year for borrowers. As the government has attempted to stem high inflation, they have increased interest rates.

On the flip side, 2023 has been an excellent year for savers because higher interest rates for borrowers also mean higher interest rates for savers. You can currently earn a nice return on select high interest online savings accounts and certificates of deposits (CDs).

Still, there’s been a bit of a unique situation this year with CDs. While, historically, long-term CDs have come with higher interest rates than short-term ones, the opposite has been true recently. But why is that, exactly? And which term CD is better for you now?

Why short-term CD Rates Are higher than long-term ones right now

Historically, long-term CDs came with better rates to encourage savers to keep their money with the bank for longer. But the recent market has been a bit unusual and many banks have been hesitant to offer today’s great rates for longer periods.

That’s because the interest you earn on your bank accounts is tied to an interest rate controlled by the Federal Reserve, called the Federal Funds rate.

Banks are hesitant to offer a high rate on a long-term CD, because they are worried the federal funds rate could drop during the CD’s lifespan. Especially given the Fed has come right out and said that in 2024 it is likely to reduce the Federal Funds rate.

This is why, right now, you can find a better annual percentage yield (APY) on a 1 year CD versus a CD with a longer maturity date.

What happens if the Federal Reserve decreases interest rates?

If the Federal Reserve drops interest rates (as it’s expected they will), the rates you are currently enjoying on your savings accounts will fall as well.

Every time the federal funds rate changes, bankers decide if they will adjust the rates they offer to their customers in line. As a former banker, I can tell you, we almost always did when it was in the bank’s favor, and would deliberate a bit longer if it was in the customer’s favor. So of the Fed drops rates, you can bet your bank will also lower the savings rate they are currently offering you.

Presently, online savings accounts are offering rates in the low to mid 4 percent range. Personally, I have a Barclays online account offering 4.35% APY. I use this to park money I will need in the short term because its easy to access and offers a great rate.

At the time of the writing, the rate offered on a 1 year CD is nearly a full percentage rate higher at 5.3%!

I have just shifted a substantial portion of my cash savings from my online savings to a 1 year CD.

Barclays Online Savings Rates Current as of 1/25/2024

These are great interest rates, but Barclays is not the only provider. Search online for “high rate CDs”, to find the best rate out there.

Which is the Best CD Term for you?

As is the case with most financial questions, the answer to which CD length is better for you is a personal one. For many savers, the interest rate is their key consideration, so they will jump at the higher rate and shorter term.

However, you need to figure out how long you could go without needing to access this money. You should never put your entire cash savings into a CD. That’s because if you need the money during the year, you will pay a penalty for making an early withdrawal. My advice is to keep at least three to six months of living expenses in an online high interest savings account for emergencies and consider moving the rest to a 1 year CD to lock in these great rates.

What’s the smartest move I can make today with my savings?

The smartest money move you can make right now is to lock in today’s great rates, by stashing a portion of you cash (liquid) savings in CDs with a one-year maturity.

The longer you can lock in today’s great rates, the happier you will be if rates go down as the Federal Reserve has predicted they will.

Whatever you decide to do, just be sure you’re NOT leaving your money sitting in a regular savings account with a brick and mortar bank. The average savings rates offered by main street banks is less than half a percent!

Remember, if you’re not earning more than the inflation rate (3.4% in January 2024), you’re LOSING money by having money in these “savings” accounts. You’ll always want to keep an eye on the current rate and aim to have your savings and investments earning more than the rate of inflation.

The bottom line

These rates won’t last forever, so don’t let the window of opportunity pass and lock in a great rate now. Start researching your CD account options today.