With inflation showing signs of cooling down from 40-year highs, the Federal Reserve may soon reduce interest rates from their current elevated levels. Savers looking to capitalize on today’s still-high rates could consider opening a 3-month certificate of deposit (CD) to lock in short-term returns before the Fed makes any moves.
The top 3-month CDs currently offer eye-popping annual percentage yields of upwards of 5% or more, well above regular savings accounts and money market accounts. For instance, Popular Direct has a 5.00% APY 3-month CD, while Alliant Credit Union offers 4.25% APY. Opening one of these competitive accounts now lets you take advantage of an attractive rate and flexibility before any imminent Fed rate cuts in the coming months.
Inflation is dropping but Still Above Fed 2% Target
The Consumer Price Index rose 6.4% year-over-year in January, down from a recent peak of 9.1% in June 2022. And the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, shows inflation running at a 5.4% annual pace as of December 2022, cooling from its recent high of 7.1%.
While inflation metrics are certainly moving in the right direction and closer to the Fed’s 2% average inflation target, they still remain well above that goal. And that is why the Fed may keep rates elevated in the very near term. But expectations are mounting that the central bank could actually start cutting rates later this year if current inflation relief persists.
What to Expect with Fed Policy and Why 3-Month CDs Make Sense
The Fed raised its benchmark federal funds rate seven times in 2022, from near zero to a range of 4.50% to 4.75% currently. That spurred banks to hike the rates on consumer lending products like credit cards, home loans, and auto loans, as well as boost the returns on deposit accounts like high-yield savings, money market accounts, and CDs.
After its large-scale rate hike campaign last year, the Fed has held policy steady at its last two meetings. And futures markets show traders are betting on rate cuts commencing as soon as June 2023.
So while the Fed may keep rates static over the next couple meetings, the direction could certainly shift later in 2023 if inflation keeps trending down. That’s why locking in one of today’s top 3-month CD rates for a short period allows flexibility around any changes in Fed policy.
If inflation plummets faster than expected and the Fed drops rates this summer, you wouldn’t be stuck earning meager returns for years on a long-term CD. Instead, your brief 3-month term would mature, allowing you to reassess the outlook for inflation, Fed policy, and interest rates generally. You could then decide whether to shop around again for another competitive short-term CD or lock up your money for longer when rates descend. Additionally, you can also read about- Top CD Investment Strategy.
The Takeaway on 3-Month CDs
Inflation is moving toward the Fed’s goal, albeit gradually. And that progress puts rate cuts on the table later this year if prices keep moderating. With a 3-month CD, you can play offense ahead of any Fed pivots while retaining flexibility should policy adjust.
The highest 3-month CD rates still outpace inflation by a wide margin today. So opening one now lets savers realize returns well above the rising cost of living. And the short 3-month duration allows account holders to re-evaluate things like Fed rate policy and inflation metrics once the term ends.
Before any imminent Fed rate cuts materialize, locking in a 5% APY with a competitive 3-month CD ensures you capitalize on today’s still-high returns. But you won’t get trapped earning lackluster interest if or when rates drop. The window for outsized short-term CD rates likely won’t stay open for long, though. So act fast to seize higher yields.
