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Concern over a rising inflation rate increased on Wednesday when the Bureau of Labor Statistics released its latest inflation reading. That showed inflation ticking up in January to 3%, now a full percentage point over the Federal Reserve’s target 3% goal. That increase marked the fourth consecutive month in which inflation rose, following minor increases in October, November, and December. And it all but ensures that interest rates on a range of borrowing products will remain elevated, perhaps for much longer than economists expected when the Fed began its rate-cut campaign last September. And, if inflation continues to rise, hikes to the federal funds rate may become more realistic.
While this isn’t welcome news for borrowers, it extends a high, high-interest-earning opportunity for savers. Those who haven’t taken advantage of high rates in recent years now have another chance to do so by opening a certificate of deposit (CD) account. But they may not want to rush into an account opening without first understanding how the latest inflation rise could impact CD interest rates. Below, we’ll break down what to know now.
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How CD interest rates could be impacted by the inflation rise
CD interest rates, already in a range between 4% to 4.50%, are unlikely to change by a significant degree in the short term, even after Wednesday’s inflation report release. That’s because rates tend to follow the Fed’s rate actions, as was seen when rates rose as high as 6% or 7% when the federal funds rate hit a 22-year high. That was seen again when that rate started to decline and CD rates soon followed. So CD rates aren’t likely to move materially in either direction until the Fed meets again in March.
But that doesn’t mean they’ll remain completely static either. Depending on the lender in question, CD rates may tick up slightly before the Fed’s next meeting. Lenders take guidance from the Fed but they aren’t directly dictated by what does or doesn’t happen with the bank. So if lenders anticipate the Fed keep rates higher for longer – or, even issuing another increase – they may preemptively start adjusting their CD rate offers higher to compensate.
So, with the increase in inflation and another Fed meeting not on the calendar until March 18, savers should use this time to explore their CD account options. That means comparing rates on both short-term and long-term accounts, calculating their potential returns and precisely determining how much they can afford to part with for the full CD term. It’s too soon to tell if the latest inflation reading is a sign of additional rate hikes or just a hiccup towards the Fed’s inflation rate goal. But it’s not too soon to open a CD. Savers should be strategic and take advantage by locking a high CD rate while they’re still readily accessible.
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The bottom line
Right now, the impact of inflation’s rise on CD rates is expected to be relatively tame. But expectations aren’t always reality and if inflation continues to rise or if the Fed hints at higher rates for longer, rates on CDs and high-yield savings accounts may become entrenched at today’s elevated level, or potentially start rising again. All of these factors should motivate savers who didn’t take advantage of high CD rates to instead take action now. Just be sure to do so with a CD account that meets your financial needs and goals or you could risk having to pay a costly early withdrawal penalty to regain access to your money.