3 CD account mistakes to avoid after this week’s Fed meeting

A certificate of deposit (CD) account is easy to operate and simple to benefit from. Just deposit an amount of money into an account with a set rate and term, let it sit in the account untouched for the full term length and then withdraw it — with the full interest earned — upon its maturity date. From there, you can open a new account, ladder the funds among multiple accounts or revisit your other savings account options, like high-yield savings accounts.

While a CD is simple to use, however, and easy to earn a high return from right now, there are still some costly mistakes that should be avoided. This is particularly true for prospective account holders who haven’t taken advantage of the high rate climate of recent years and these mistakes are critical to avoid now, with a new Federal Reserve meeting on the schedule for later this week. 

While interest rates aren’t expected to be changed at the meeting (the CME Group’s FedWatch tool has a rate pause listed at almost 100% certainty), there are CD account mistakes savers should avoid after the meeting. Below, we’ll break down three to know now.

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3 CD account mistakes to avoid after this week’s Fed meeting

The Fed is widely expected to keep its federal funds rate at a range between 4.25% and 4.50% this week. Here’s what prospective CD account holders should avoid doing after that decision is formalized:

Assuming rates will remain high

Just because the federal funds rate will remain static for a bit longer, it doesn’t mean that CD rates will remain high, too. Lenders don’t need to wait for official Fed rate changes to adjust what they offer savers. So if rates remain static but lenders start assuming that additional rate cuts for later this year are inevitable, they may start reducing their CD rates to get ahead of any formal changes. Assuming rates will remain high then and, thus, waiting to open a CD would be a mistake. Instead, savers should use this pause in rate changes to take advantage while they still can.

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Opening the higher rate short-term CD

Many savers simply look at the interest rate as the only consideration. But if you do that with a CD now, you’ll likely only open a short-term version that matures in around three to six months. But opening the higher rate, short-term CD is a mistake worth avoiding. If the true goal is to earn as much interest as possible, that can only be done by opening a slightly lower rate, long-term CD with inherently more interest-earning potential. Crunch the potential returns on the same deposit for both (use $10,000 as a starting point) to illustrate the difference in earnings. Then start shopping around for the longest-term CD you feel comfortable with. That said, there are mistakes to avoid with long-term CDs right now, too …

Depositing too much for too long

Once you’ve determined how much more you could earn with a long-term CD versus a short-term one now, it may be tempting to deposit a lot of money into the longer account. But that would be a mistake worth avoiding, too. If you’re unable to maintain your account balance for the full term you’ll get stuck paying an early withdrawal penalty to regain access, which could result in all of the interest you’ve earned to date being eliminated (each lender has its own early withdrawal penalty). To truly optimize today’s pause in rates, then, take the time to determine both how much you can potentially earn with a variety of CD rates and terms — and then open the one that you can realistically afford to leave alone for the full term length.

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The bottom line

A pause in interest rate cuts may not be optimal for borrowers but, if used strategically, can be beneficial for potential CD account holders. But they’ll need to avoid making the above mistakes to truly take advantage of this timely opportunity. By being strategic and measured in their approach, they can potentially earn hundreds if not thousands of dollars in interest, even if the rate climate continues to cool later this year and in the years that follow.