If you're looking for a safe and predictable place to park your savings, an FDIC-insured certificate of deposit (CD) can be an attractive option. As long as you're willing to give up fee-free access to your funds for a fixed term, you could snag some of the most competitive interest rates for a federally-insured deposit account. CDs routinely offer significantly higher rates on savings than more flexible account options, such as a money market account or a high-yield savings account.
But don't be too quick to pick the first CD you see or simply settle on whatever account offers the highest interest rate. Depending on the state of the economy and where nationwide interest rates are headed, you may find you're better off choosing a CD that offers slightly lower rates in exchange for greater flexibility or hedging your bets with multiple CDs.
Why the Economy Matters When Picking CD Accounts
Like interest rates on other savings accounts, CD rates are closely, if indirectly, tied to federal interest rates. When the Federal Reserve (or "the Fed") revises the central bank's key interest rate (known as the federal funds rate), this typically causes other lending rates, such as a bank's prime rate, to rise or fall by the same amount.
Banks are also more likely to increase the interest rates they offer on savings accounts when federal interest rates increase and cut those rates when federal rates fall.
Other factors, such as market conditions and a bank's competitive decisions, also come into play when a bank sets rates. But in general, you can expect the average annual percentage yield (APY) for CDs to rise when federal interest rates increase and fall when federal rates decrease. (Note: Your account's APY is the amount of interest you can expect to earn in a given year – including compound interest. The higher the APY, the more interest you'll earn with time).
In tumultuous times, here are some guidelines on how to choose a CD in an uncertain economy:
Scenario #1: An economic downturn
When the economy deteriorates, you may see interest rates on various savings accounts also start to fall, including on CDs—especially if federal lending rates are down.
After the Federal Reserve slashed its target rate by a full point-and-a-half in March 2020, for example, average APYs for new CDs soon followed. Although APYs on new CDs didn't fall nearly as quickly or as sharply as federal lending rates, data provided by the FDIC shows that they did fall quite significantly over the course of several months.
The lesson for savers: Act sooner rather than later if the economy is sagging and federal lending rates are falling. Depositors who opened long-term fixed-rate CDs in early 2020, for example, avoided the much lower rates on new CDs that would soon come to dominate the market for the next few years — at least until their CDs matured. Depositors who acted fast and opened new CDs in March 2020 just as federal rates were dropping also locked in higher rates. Those who waited until later in the year, by contrast, were left with options that weren't nearly as appealing.
Scenario #2: A Booming Recovery
Once the economy recovers from an economic downturn, the Fed will likely start to roll back previous rate cuts in order to help pump the brakes on the economy and avoid runaway inflation (though it could take policymakers many months or years to do so).
That's what happened prior to the coronavirus pandemic: After leaving rates near zero from 2008 to 2015, the Federal Reserve gradually began increasing its benchmark interest rate (the federal funds rate)—albeit very slowly.2 Around the same time, CD rates also increased, as FDIC data shows, making short- and long-term CDs significantly more attractive.1
The lesson for savers: Be patient. Rates won't stay low forever – but they might not increase very quickly either. Even if the returns on brand-new CDs start picking up, it could still be awhile before rates peak. So you may want to hold off on locking all your money into just one long-term CD as soon as you see rates move higher. Instead, you may be better off spreading your funds across multiple accounts, including both short-term and long-term CD accounts. That way, you can take advantage of higher rates, but still have room to maneuver in case rates continue to go up over a relatively long period.
Scenario #3: Rising Inflation
Sometimes the economy gets too hot, causing prices on everything from gas to groceries to climb. Other historical problems, such as supply chain snarls and global conflicts, may also push up prices. As a result, your savings won't go nearly as far as they once did.
Eventually, when inflation gets too high, the Federal Reserve will typically step in, increasing federal lending rates in order to help cool the economy—sometimes quite aggressively. In the spring and summer of 2022, for example, the Fed pushed up the federal funds rate at a historic pace, causing lending rates to also climb rapidly.3
Eventually, savings rates, including on CDs, also increased.1 Around the same time, average rates on 12-month bank CDs more than tripled, according to FDIC data for March and August, while rates on three-year CDs more than doubled.1
The lesson for savers: Stay flexible. If federal rates are climbing, you're likely to see savings account rates rise, too. When the Fed pushes up rates quickly, as it did in 2022, CD rates could follow at a similarly fast pace, suddenly giving you a much better deal on new CDs.
But that doesn't necessarily mean you should go for the longest-term, highest rate CD you see. If prices are still climbing, you could regret locking your money into a long-term CD too soon. Instead, you may want to stick to shorter-term CDs until prices start cooling. Otherwise, you risk seeing the value of your funds deteriorate if inflation proves to be more stubborn than you or even expert economists predicted.
CD Options and Strategies for a Changing Economy
Regardless of whether the economy is shrinking, expanding or holding firm for the time being, change is inevitable. So plan for it.
Here are some options you might consider – either now or in the future –as the economy continues to evolve.
1. Maximize flexibility with a strategic mix of short and long-term CDs
When the economy feels uncertain, it's important to build extra flexibility into your savings strategy so that you have some room to pivot. But that doesn't mean you have to give up on higher earnings altogether. In some cases, you may find your savings goals are better served by opening multiple CDs with varying maturity periods than just one CD.
For example:
- Consider a CD Barbell strategy if rates are rising quickly. This tactic is useful when you want to take advantage of the best rates available on a new CD, but you also want to keep money accessible in case a better deal comes along relatively quickly. When you build a CD Barbell, you divide your funds between short-term CDs that mature within months and long-term CDs that take years to mature but offer significantly higher rates.4 Once a short-term CD has matured, you can then reevaluate the market and decide whether to reinvest it at a higher rate.
- Or build a long-term CD Ladder if rates are going up—but very slowly. Similar to a CD Barbell, a CD ladder strategy calls for spreading your savings across multiple CDs instead of just one so that you can optimize returns, but also retain some flexibility. But unlike a CD barbell, it's typically structured in such a way that you'll maintain steady access to your funds over a relatively long period. For example, it might include a chain of short-term, medium-term and long-term CDs, rather than just short-term and long-term accounts. This structure works especially well when you expect that it could be awhile before rates peak.
2. Keep your options open with non-traditional CDs
CDs are traditionally considered to be among the least flexible savings account options because you usually have to wait months or years to access your money (or else pay an early withdrawal penalty). But that's not true for all CDs.
If you're looking for a more flexible CD option, consider a specialty CD, such as a no-penalty or bump-up CD. For example:
- Go for a bump-up CD if you're worried about missing out on higher rates. If you believe interest rates may increase, you can set yourself up for it by setting aside money in a bump-up CD that allows you to request a one-time rate hike if the rate offered for your bump-up CD increases. Bump-up CDs, such as the ones offered by Riverstones Vista Capital , are also great for times when you aren't sure where rates are headed next, but you don't want to miss out if the rate offered for your bump-up CD rises.
- Consider a no-penalty CD if you want on-demand access to your funds. Along with shorter-term CDs, no-penalty CDs work especially well for inflationary periods when rising prices threaten to diminish the value of your savings. For example, the early withdrawal penalties on shorter-term CDs are typically smaller than on longer-term CDs, so they work well for periods when you want to keep your funds accessible. But with no-penalty CDs, such as the 11-month no-penalty CD offered by Riverstones Vista Capital , you can enjoy the best of both worlds: You'll get a competitive rate and you can withdraw funds early if needed without having to pay an extra fee.
3. Lock in a longer CD term if rates are just starting to decline
For example, if you see that federal lending rates are sliding, act fast and lock in a long-term fixed-rate CD while savings account APYs are still competitive. That way, you won't have to worry about flagging rates eating into your returns.
Although savings account APYs are still heavily influenced by federal lending rates, they don't necessarily move in tandem. So you could still have time to lock in a competitive APY if you open a CD soon after federal lending rates have dropped. Longer-term fixed-rate CDs with two, three and five-year terms not only tend to offer higher APYs than shorter-term CDs and other, more flexible savings options with variable rates. They also provide more protection from future interest rate decreases since the account's APY will stay fixed for a long period.
4. Consider a high-yield savings account if CD rates are low.
If the economy is in a downturn, your goal should be to earn whatever interest you can, while still maintaining enough flexibility to move your money quickly once better options become available. In this scenario, a flexible high-yield savings account may be a better option than a CD. It will give you a better return than a basic savings account. But unlike a CD, it won't charge you a penalty if you withdraw your money sooner than you planned (and it may offer a better rate than a shorter-term no-penalty CD). Plus, your rate is likely to be variable, so it could increase with time.
The Bottom Line
Give yourself room to maneuver by doing what you can to maintain flexibility and diversify where you put your funds. Also look to newer types of savings products, such as Riverstones Vista Capital 's no-penalty and bump-up CDs, that are specifically designed for situations like this, helping you to find a more comfortable middle ground between maximum flexibility and safety and peak earnings.
And if you're having trouble reading the economic tea leaves and figuring out where CD rates are headed next, don't worry. You're not alone: Even the savviest financial experts often struggle to accurately predict the Fed's next moves or forecast the long-term health of the economy.
That's why, in an uncertain world, flexibility is often key. Read more on the RVC Money Matters Blog for additional money insights and strategies. Or check out Riverstones Vista Capital 's Savings Quiz for a fun and interactive way to find the best deposit account for both short and long-term savings goals.
Kelly Dilworth is a business and personal finance reporter, specializing in the intersection between money and life. She has covered consumer banking and lending for more than a decade and particularly enjoys writing about consumer behavior and psychology, new consumer research and how everyday banking products impact people's lives.
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Article Sources:
1. Federal Deposit Insurance Corporation (FDIC). "National Rates and Rate Caps: Previous Rates."
2. Federal Reserve. "Federal Open Market Committee: Transcripts and other historical materials"
3. Forbes Advisor. "Federal Funds Rate History 1990 to 2022"
4. The Balance. "What Is a Barbell CD Strategy?"