The Federal Reserve is in a holding pattern on interest rates – and some banks are similarly keeping a steady hand on yields for certificates of deposit. In June, average CD rates were relatively unchanged on the month, according to a July 7 report from Morgan Stanley. The highest average CD rate among the banks in the firm's coverage ticked up 1 basis point to 3.94%. The average rate on one-to-12-month CDs inched higher by 1 basis point to 3.9%. One basis point equals one one-hundredth of a percent, or 0.01%. Earnings calls from banks should shed some light on where CD yields are heading next, said Morgan Stanley analyst Betsy Graseck. "Our expectation is portfolio CD rates should be down in 2Q as longer term CDs continue to mature, but the benefit should fade until we get the next round of rate cuts," she wrote. The Federal Reserve's stance on interest rate policy affects CD rates. Central bank policymakers have kept the fed funds target rate at 4.25% to 4.5% since December, and CD yields – though well off highs that once exceeded 5% – are still rich if you know where to look. Rates topping 4% Though CD yields aren't high enough to keep up with inflation over the long term, they can reward investors who want to earn some interest on idle cash. "I have clients with extra cash where we have plenty invested in markets, and this is a buffer if they need it," said Catherine Valega, certified financial planner at Green Bee Advisory in the Boston area. Investors who recently had their CDs mature are locking up in three-to-six-month instruments for now, she said. "To me, it's the shorter term that's the sweet spot of the curve, versus the longer term," Valega added, noting that investors can opt to stagger short-term maturities. This means buying several CDs with varying maturities – say three, six and nine months – and taking advantage of the highest yields. As those CDs mature, investors can decide how to move forward with the proceeds, including whether they want to redeploy that money into the market. "When that 4% gets closer to 3%, we start thinking, 'Let's get some of this money out of cash and into the stock market,'" Valega added. Banks offering annual percentage yields (APY) exceeding 4% include Sallie Mae, which touts a 4.2% yield for a 12-month CD, and Popular Direct, which pays a 4.4% APY on a 12-month CD. Keep your time horizons and goals in sight Even while yields are attractive, investors should proceed carefully before they lock up their money in a CD. Those who "break" a CD prior to its maturity are subject to penalties, so be sure you can commit money you won't need right away. If you'll need access to your funds, a high-yield savings account or a money market fund might be a more prudent choice. Consider that the Crane 100 Money Fund Index has an annualized seven-day yield of 4.11%. Just be aware that banks and fund families can and do adjust those rates at any time. "Make sure you understand what you need the money for and your goals for it in the long- and short term," said Matt Schulz, chief consumer finance analyst at LendingTree. "I do think generally speaking that if you're looking to maximize your rates, it's a good time to lock that down now."
