What will happen to short-term CD rates in 2025? Experts weigh in
Getty Images
interest rate at High Yield Savings Account and Certificate of Deposit (CD) has declined in recent months, thanks in large part to Three federal funds rate cuts The Fed ends in 2024. Before rate cuts, yields for CD account holders were typically around 5% or higher, but highest rate Now the range is from 4% to mid-4%.
The Fed’s interest rate cut affects deposit accounts, especially short-term certificates of deposit (including Terms matures in 12 months or less). Many banks and credit unions have responded to lower federal funds rates by lowering interest rates on deposit accounts, including rates on short-term certificates of deposit. At the same time, many savers are opting for long-term certificates of deposit to lock in interest rates or exploring alternatives such as high-yield savings accounts.
The changing interest rate environment raises some important questions about the future of short-term term deposit rates. That is, will short-term deposit rates rise, fall, or remain stable? Experts we spoke to said much depends on how the Fed adjusts monetary policy in 2025, among other factors. Below, we break down what you need to know now.
See how much you can lock in short-term CD rates now.
What will happen to short-term CD rates in 2025?
Here are three things that could happen to short-term deposit rates this year and why:
Short-term CD rates could fall in 2025
At its most recent meeting in December, the Federal Open Market Committee (FOMC) said it expected a rate cut in 2025, but the exact timing was unclear. However, if this happens, deposit rates may fall as a result.
“Because CD rates are tied to the Treasury yield curve, the short end of the curve is more susceptible to the federal funds rate,” said Dwayne Safer, associate professor of finance at Messiah University in Mechanicsburg, Pennsylvania. “If the Fed continues to cut rates, Short-term deposit rates are likely to fall. Markets are pricing in one to two quarter-point rate cuts in 2025, and the stickiness of recent inflation data has led some to believe the Fed will cut rates only once in 2025.”
If interest rates do drop, you might consider opening a short-term term deposit now to take advantage of current rates.
Get started with short-term CDs today.
Short-term CD rates could rise in 2025
As stubborn inflation continues to put pressure on Americans’ budgets, many analysts and rate watchers believe it will be difficult for the Federal Reserve to cut interest rates significantly in 2025. Bureau of Labor Statistics (BLS)prices in December 2024 increased by 2.9% year-on-year, slightly higher than the 2.7% increase in November. If inflation rises further, the Fed may have no choice but to raise the federal funds rate to control inflation.
“Short-term deposit rates could rise this year if the Fed changes course and starts raising rates to combat inflation,” said Andrew Herzog, chief financial officer at Watchman Group in Plano, Texas.
However, Herzog noted that monetary policy may not be the only factor pushing short-term deposit rates higher. “If regional banks try to entice consumers to keep their money in banks rather than buying Treasury bonds or money markets, their deposit rates could rise.”
Short-term CD rates likely to remain unchanged in 2025
“If our current economic environment remains unchanged, short-term CD rates will likely remain unchanged in 2025,” explains Cathleen Tobin, CFP and financial planner at MoonBridge Financial Design in Rhinebeck, New York. “If the Fed will “Continuing to wait for a reduction in benchmark interest rates, or if inflation remains at current levels, may lead banks to keep short-term deposit rates unchanged.”
As the economy continues to stabilize, interest rates are likely to remain unchanged for the foreseeable future. In December, the Fed said it would monitor inflation, employment and other data before making any major changes to interest rates.
Inflation edged up in December but has remained relatively stable since last summer. at the same time, Latest Bureau of Labor Statistics The report said 256,000 new jobs were created in December and the unemployment rate remained at 4.1%. Over the past few months, the ratio has fluctuated between 4.1% and 4.2%, which is negligible.
bottom line
When deciding where to invest your money in 2025, consider whether you would be more comfortable locking in rates now or waiting to see how things pan out. If you expect deposit rates to fall later this year, it might be wise to lock in your rate now. Top CD accounts still offer interest rates in the 4% to 4.5% range. this CD term of your choice should be aligned with when you need the money so you avoid paying Early withdrawal penalty If you have to take it out earlier than planned.
On the other hand, if you think interest rates may rise, you may want to postpone or put money aside high yield savings account at present. This account type can provide you with competitive returns without tying up your capital.
