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For the past year, comparing short-term CD rates vs. long-term CD rates showed that short-term CDs had better rates overall. This is because people expected the Federal Reserve to start lowering rates in mid-2024, and banks didn't want to be stuck paying a much higher rate than the market supported for several years.
The situation is different now. The Federal Reserve lowered its rates again in November after dropping them for the first time in years at its September meeting. Between the two meetings, the federal funds rate has gone down by 75 basis points. With future Fed rate drops uncertain, long-term CD rates — specifically, 3-year, 4-year, and 5-year CD rates — are starting to look more promising, which could be beneficial if you have your eye on CDs still.
Between the September and November Federal Reserve meetings, national 3-year, 4-year, and 5-year CD rates were pretty low. Even the best long-term CD rates were starting to dip under the 4% mark, going into the 3.90% APY range. This is in contrast to where long-term CD rates were at the beginning of the year, when you could find long-term CDs offering close to 4.50% APY.
But now, some credit unions are starting to raise their long-term rates back up. The America First Credit Union 5 Year Certificate raised its rate to 4.25% APY, or annual percentage yield, within the last month, and the Dow Credit Union 3 Year Simple CD is offering 4.35% APY. Both credit unions are offering higher rates on their 3-year CDs, 4-year CDs, and 5-year CDs than they were before the November Fed meeting.
Other banks have lowered their short-term CDs more than they've lowered their long-term CDs, closing the rate gap between the two. For example, Synchrony Bank's best CD rate is the Synchrony 9 Month CD, which offers 4.05% APY. In comparison, the Synchrony 5 Year CD offers 4.00% APY.
Long-term CD rates are still lower than short-term CD rates overall. But this trend indicates that it might be worth it to keep an eye on long-term CD rates going forward, even if you're not ready to open one now.
Economically, we're currently in an inverted yield curve. An inverted yield curve occurs when short-term CDs and treasury bonds yield better than long-term ones. It's more common for long-term investments like bonds and CDs to yield better than short-term investments.
One of the reasons we were in an inverted yield curve was because of economic conditions. It was predicted that the Federal Reserve would sharply cut its rates in 2024, and the Federal Reserve is showing signs of slowing down with rate drops.
The CME FedWatch tool, which predicts whether the Federal Reserve will make rate drops at its meetings, is split almost evenly between predicting a 25 basis point rate drop and no changes to the federal funds rate for the Fed's December 17-18 meeting. It cut rates by 50 basis points in September and by 25 basis points in November.
At a speech on November 14, Federal Reserve Chair Jerome Powell said, "We are moving policy over time to a more neutral setting. But the path for getting there is not preset. In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks. The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully."
The recent election of Donald Trump might also affect the Fed's rate changes. Trump's plans to enact heavy tariffs could impact the Federal Reserve's plans to lower rates throughout 2025 because his tariffs could raise the inflation rate. Traditionally, the Federal Reserve combats inflation by raising its rates.
Right now, short-term CDs are still consistently offering the best CD rates compared to long-term CDs. But as the economy changes, it's worth keeping an eye on 3-year CDs, 4-year CDs, and 5-year CDs to see if they continue to grow or become better options as time passes.
And if you have a specific long-term savings goal, it might be worth considering a long-term CD to lock in a good interest rate. If the risk of incurring early withdrawal penalties in a long-term CD is too much, you can open a CD ladder with a long-term CD in it to mitigate that risk.
