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Is now the time to lock in a CD?

For the past few years, the Federal Reserve’s rate hikes have pulled up CD yields with them. Tropical Financial increased its CD returns, too. But the agency stopped pushing in late July when it last raised its Fed Funds rate.

Does that mean CD yields will stop rising, too? And if we’re near a peak, or at least a plateau, which CD maturity should you lock in?

The Fed boosted its key rate five times last year and another four times this year. The biggest jumps occurred during 2022 when the open market committee voted to raise its rate by three-quarters of a percentage point four times.

This year, the increases have been much smaller, one-quarter of a percentage point at a time.

When deciding which CD is right for you now, keep in mind that the Fed’s actions impacted short-term rates more than long-term ones. As a result, the one-year CD paid an average yield of 1.74% the week of Nov. 6, much higher than the 5-year CD yield average of 1.45%, according to Bankrate.

That’s not normal. Bankrate says that the 5-year CD paid about two-thirds more than a one-year CD five years ago. Look back another five years, and you’ll find that the longer-term CD paid triple the interest of the shorter one.

Given the Fed’s inaction and CD yield aberrations, here’s what to think about when shopping for a CD:

Favor going short, not long. You will find better returns on CDs of one year or less than on terms of 2-5 years. Six to 12 months from now, you can re-evaluate whether to roll over your CD or switch to a longer maturity.

Follow the Fed. Financial institutions and markets are taking their cue from the agency on whether to raise or lower their CD yields. If the Fed Funds rate stays steady at 5.50%, banks and credit unions will slow their yield increases and may stop raising them entirely.

Look for specials. Institutions are offering better deals on CD terms that are slightly shorter or longer than one year. Tropical Financial has been offering a 9-month CD with a higher return than its 6-month or 12-month CDs.

Note the minimum. Eye-popping yields may be available only if you deposit $25,000 or more. You may not want to tie up that much cash or another institution may have a better deal for that dollar amount.

Read the fine print. Before you open a CD, ask:

  • How many days after the account matures do I have to withdraw the funds before the CD automatically renews?
  • Can I receive interest payments during the term only at maturity?
  • What is the penalty for early withdrawal?
  • When withdrawing funds early, can I part of the balance, or must I take the entire amount?

Know your financial institution. A growing number of banks and credit unions outside our region and Florida are advertising in local newspapers and online. Make sure that your investment is federally insured. Find out where the institution is located, research its financial condition, and ask how to contact customer service when you have a question.

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