Is a short- or long-term CD better this June? Here's what experts think.

CBS News

5 days ago

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The decision between short- and long-term CDs this June will be based on a variety of timely factors.
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While the Federal Reserve continues to uphold the current federal funds rate, savers can maximize their returns in this high-rate environment. A certificate of deposit account (CD) comes with a fixed interest rate so you can lock in returns for a set term. In normal circumstances, long CD terms would provide the most competitive Annual Percentage Yield (APY). However, in these uncertain times, there's a notable switch, and short-term CD accounts are providing the highest interest rates.
Though CD interest rates remain elevated, they may start to drop in anticipation of future rate cuts from the Federal Reserve. Based on that, now could be a good time to secure a high CD account interest rate.
But unlike a savings account, CD funds aren't liquid and come with early withdrawal penalties if you access them before the CD term ends. So timing is of utmost importance when deciding between a short-term and long-term CD now. We spoke to banking and credit union professionals about which could be better to open this June.
Start by seeing how much interest you could be earning with a high-rate CD here.
Is a short- or long-term CD better this June?
If you want to put your money in something that is more stable than the stock market and offers a high return, a certificate of deposit fits the bill. CD rates may also provide higher yields than a traditional savings account. But you want to have a strategy, especially if you're weighing short vs. long-term CD accounts.
"I think anytime someone's making a CD decision, it really should be, am I just trying to maximize the amount of cash that I'm earning or is it a per purchase choice?" says Derik Farrar, head of everyday banking and borrowing at U.S. Bank.
Answering this question can help guide you on whether a short-term CD or a long-term CD would be a better option for your particular situation.
Why short-term CDs could be a better option this June
If you're looking for the highest CD interest rates, there is no doubt that short-term CDs are the better option right now. CD terms of six to nine months are coming in higher than what you might find at 12 months or more.
"I think right now in the market, the attractive rates are still really under 6 months," says Farrar. All of the experts we spoke to agree that short-term CDs are optimal for the high rates and earlier CD maturity dates.
"I think a short-term CD is a better option than a long-term CD, just because of the current rate environment and the uncertainty that exists in the marketplace right now," says Karin Cook, vice president of client deposit services with Merchants Bank. "I think banks are more aggressive on their short-term rates right now."
See what short-term CD rate you could lock in here now.
Why long-term CDs could be a better option this June
Long-term CDs aren't providing the highest yields in the current environment. However, they could still be a useful tool if you want your money to grow at a fixed rate and park it somewhere. Looking at the CD term maturity and early withdrawal penalties are paramount. Additionally, review your personal financial situation to see if a long-term CD makes sense right now.
"A good candidate would be someone who maybe has a high-yield savings account that is earning a lot. So in effect, they've created the short-term CD with a high-yield savings account, and they really want certainty for a longer period of time," says Farrar.
Otherwise, the general consensus among the experts we spoke to is that long-term CDs are more risky in the current environment and not as advantageous as in years past.
"We recognize that members are nervous. They're worried about the economy. The rates long term really aren't great. We don't want to have our CD portfolio from our members tied up long term because we don't know what the Fed is going to do and where those rates are going to end up," says Carma Peters, president and CEO at Michigan Legacy Credit Union. "Now we do have longer-term certificates that we do offer members. They're not taking them," adds Peters.
Why you should use a CD ladder strategy now
The current CD rate prediction is that interest rates are likely to fall gradually. As CD account rates are fixed, you can lock in above-average yields right now across various CD terms by using a CD ladder. Through a CD ladder, you can put your money in several certificates of deposit accounts with varying maturity dates.
Traditionally, the idea is that you have short-term CDs that can give you access to cash earlier, while getting high rates in long-term CDs. But we're not in a normal environment and there's an inverted yield curve where the better rates are with shorter terms. Because of this, whether it's a good idea to do a traditional CD ladder spread out over years or modify it with several short CD terms depends on your goals and liquid savings.
The bottom line
The CD interest rate forecast is still somewhat murky, as it seems more and more likely that the Federal Reserve will hold rates steady after its June meeting. In the current environment, it's not just about whether a short-term or a long-term CD is a good idea. Farrar says it's more about, "Do I want to be in a CD or do I want to be in a liquid product?"
Given these various factors and the fact that you could get hit with a penalty before your CD matures, there are some questions to ask yourself before deciding between a short-term or long-term CD. What are your goals? Do you have an emergency fund? Do you need those funds before the CD term ends? Your answers can help guide you. But in general, short-term certificate of deposit rates will provide you the better yield right now and won't lock up your funds for too long, which could be a win-win.