Why You Should Watch the Fed If You Plan to Open a CD Account
If you’re wondering whether CD rates will go up in 2022, you need to look at what the Fed plans to do with its benchmark rate. Here's what you need to know.
Aug. 11 2022, Published 8:29 a.m. ET
A certificate of deposit (CD) investment may be a great option if you’re looking for a guaranteed return on your savings. The money you put into a CD usually earns a fixed interest rate. You may choose to keep the interest earned in the account until maturity or withdraw and spend it. Will CD rates go up in 2022?
The investment market works in a manner that the higher the risk you take, the higher the potential returns you may generate. Investing in crypto and penny stocks are considered high risk bets. On the other hand, bonds and cash savings such as CD accounts are considered low risk investments. Many investors choose to have investment products with varying risk profiles in their portfolio.
What are CDs and how do they work?
A CD is a special type of savings account offered by banks and credit unions. It allows you to save money for a fixed period of time to earn interest. You may choose to lock in money in the account for a few months or several years. You can’t withdraw the money during the lock period. If you have to take out the money, then you would face an early withdrawal penalty.
Banks and credit unions may use the CD money they collect from customers to fund loans to borrowers and earn interest. They may also invest the money in products such as Treasury bonds. A portion of the profit they make goes back to CD customers as interest on their deposits.
How much money do you need to open a CD?
Many CD accounts have minimum deposit requirements. In most cases, you would need at least $1,000 to open a CD account. The CD lock periods can be as short as three months or up to 10 years.
Investors are usually advised to consider putting money in a CD once they’ve built an emergency fund. You should have money that can meet your expenses for at least three months in the emergency account.
Can you lose money in a CD?
CD accounts are usually FDIC-insured. The FDIC insurance program will refund you up to $250,000 in case the bank holding your deposit fails. Because of the FDIC protection, a CD is considered to be a low-risk investment product. However, some CD products may not come with FDIC protection, so you need to check with the provider before you sign the papers.
Will CD rates go up in 2022?
Most CD accounts offer fixed interest rates. It means that if you pick up the product when interest rates are low, you will live with it that way through maturity. As a result, many investors try to assess the direction of interest rates to identify the best time to open a CD account.
The CD interest rates are influenced by various factors. The factors with a major impact on CD rates are the length of time that money will stay in that account and the Fed’s benchmark interest rates. The longer you agree to keep the money with the bank or credit union, the higher the CD rate may be. The reason is that if the provider has more time with the money, it may earn more from lending or investing and it will reward you for it.
