Depositing $25,000 into a 2-year CD account can yield substantial returns. Inflation has relaxed somewhat recently, but the direction of interest rates is still uncertain. Although the June inflation report showed a cooling trend with annual inflation falling to 3.5% from 4.2% the previous month, Federal Reserve Chair Kevin Warsh has indicated that the central bank will not reduce rates hastily until inflation is well controlled.
This ambiguity leaves savers wondering about the duration of elevated deposit rates. For those with significant savings to invest, the uncertainty prompts challenging decisions. Delaying a certificate of deposit (CD) lock-in could mean missing out on today’s favorable rates if the Federal Reserve decreases rates. However, securing a rate now might not be advantageous if inflation rises again. The opportunity to lock in high CD returns may not be available indefinitely.
During uncertain times, 2-year CDs offer a middle ground. These CDs allow savers to maintain the current favorable yields longer than a short-term CD without a long-term commitment. Consider what a $25,000 deposit could earn in a 2-year CD opened in August and compare it to a savings account.
What Interest Will a $25,000 2-Year CD Earn If Started in August?
The best available rates for 2-year CDs now range between 4.10% and 4.30% APY, depending on the financial institution. Here’s what the interest would be for a $25,000 deposit kept untouched for the full term at these rates:
- $25,000 at 4.30%: $2,196.22 in interest
- $25,000 at 4.25%: $2,170.16 in interest
- $25,000 at 4.15%: $2,118.06 in interest
- $25,000 at 4.10%: $2,092.02 in interest
The difference between the highest and lowest rates amounts to over $104 over two years. This emphasizes the importance of researching rates before selecting a CD account. Unlike savings accounts, CD rates remain unchanged throughout the term, offering certainty amid uncertain Federal Reserve actions.
Savers who lock in a 2-year CD rate now will continue benefiting from the higher rate even if the Fed decreases rates later. The limitation is that, if rates rise, a fixed CD rate cannot capture increased gains without incurring early withdrawal penalties.
Do Savings Accounts Offer Higher Returns?
Traditional savings accounts are unlikely to offer higher returns than CDs at present. The national average savings account rate is currently around 0.38% APY, which is much lower than the lowest CD rate mentioned. A $25,000 balance at this average rate over two years yields only $190.36—significantly less than a CD at 4.10%.
High-yield savings accounts offer rates close to CDs, but their rates are variable, changing with the bank’s discretion. If the Fed reduces rates, savings account yields could drop quickly, unlike fixed-rate CDs which maintain their yield throughout the term.
Key Considerations
At current leading rates, a $25,000 deposit in a 2-year CD opened in August could earn between $2,092 and $2,196 by maturity, compared to under $200 in a typical savings account over the same period. Given the uncertain policy movements of the Federal Reserve, locking in a CD rate offers protection for today’s returns. However, it is vital to be comfortable with the funds remaining untouched for two years, as early withdrawal penalties can negate the benefits of CDs versus more flexible investments.