Why you should open a $5,000 long-term CD now that inflation’s falling again

Inflation fell to 2.8% in February, halting four consecutive months of increases, according to Wednesday’s Bureau of Labor Statistics Consumer Price Index report. This past month’s decline is the first downward movement since September, when prices fell to 2.4% after sitting at 2.5% in August. That being said, February’s inflation rate represented only a slight drop from January’s 3.0% increase. Additionally, the current rate is still above the Fed’s target inflation rate of 2.0%.

Federal Reserve Chairman Jerome Powell said last week that the Fed plans on keeping rates where they are as the bank sees how the economy plays out in the coming months. Today’s news will likely keep those rate-pause plans in place. However, we’ll know more when the Fed meets on March 18 and March 19. Looking ahead to the next few months, rate cuts could be on the table later this year if inflation continues to cool. Rate cuts could be pushed back, though, if inflation increases next month or stays at 2.8%.

Though Wednesday’s report is a positive one in the context of the past five months, the future of rates and the economy are still uncertain. Amid that uncertainty, savers who’ve been looking for cues on how to manage their certificate of deposit (CD) strategy should turn their attention to long-term CDs right now. Long-term CDs — accounts with maturities of longer than one year — offer fixed rates and guaranteed returns. Even a modest deposit, such as $5,000 can build interest over time. Below, we’ll outline three reasons why a $5,000 long-term CD is a smart choice in the current economic climate. 

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Why you should open a $5,000 long-term CD now that inflation’s falling again

With many questions about the economy still unanswered, here are three reasons why opening a $5,000 long-term CD could be a smart move right now. 

You’ll gain long-term protection against sticky inflation

It’s still unclear if inflation will continue to cool; one month of easing isn’t a strong enough signal to indicate that the economy has moved past price increases. Future inflation growth is still a possibility, so it’s important to find savings opportunities that can offer a return that stays ahead of inflation.

Multiple long-term CDs offer an annual percentage yield (APY) that outpaces inflation right now. For example, it’s relatively easy to find long-term CDs with at least a 4% APY at today’s rates. Locking in a rate at or above 4% provides a buffer between your earnings and any modest inflation increases — and the resulting market turbulence — that may happen over the next few months.

“With rates steady, CDs offer a secure way to lock in current returns without the ups and downs of the market,” says Jasmin Bell, founder of Bamboo Financial Partners, a financial advising firm. “If rates drop, you’ll be glad you locked in a higher yield.”

You can earn more than $1,000

CD issuers use compounding interest to calculate your return, which means the longer you can keep your money in a CD, the more time your APY has to compound returns on your deposit and accrued interest. Opening a long-term CD today means you maximize the time your money can earn interest at a rate that won’t change no matter what happens to the economy in the coming days and months.

Here’s what you can earn from a $5,000 long-term CD at today’s rates over four different terms: 

• 18-month CD at 4.16%: $315.22 for a total of $5,315.22 at maturity
• 2-year CD at 4.15%: $423.61 for a total of $5,423.61 at maturity
• 3-year CD at 4.15%: $648.69 for a total of $5,648.69 at maturity
• 5-year CD at 4.25%: $1,156.73 for a total of $6,156.73 at maturity

If your goal is to earn the highest rate possible right now, you’ll likely need to open a CD with early withdrawal penalties. These penalties activate whenever you pull money out of your CD before its maturity date. Often, the penalty is equal to a certain number of months of interest. You can open a no-penalty CD to avoid being hit with a fee for withdrawals, but you’ll likely get a lower interest rate in exchange for the liquidity. 

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You’ll avoid reinvestment risk

While it’s true that it’s too early to tell if inflation will continue to decline, Wednesday’s report may heighten speculation about possible rate cuts later this year. Locking in a long-term $5,000 CD today means that your rate of return will be safe from any rate cuts for the rest of the year and into 2026. 

Melynda Rodgers, a wealth advisor at Waverly Advisors, points out that opting for a short-term account such as a 6-month CD could leave you stuck with lower rates later this year if the Fed announces rate cuts before your CD matures. 

“Once you go back into the market and get another CD, you’re not going to get the same yield,” she says. 

The bottom line

Wednesday’s report showing that inflation ticked down in February is good news for savers looking at long-term CDs. Before you make your deposit, remember that CDs, generally speaking, are meant to be illiquid — plan on leaving your money in your account until maturity. However, if you’d like to keep some of your cash liquid, consider adding a short-term CD to complement your long-term CD. Known as the “CD barbell strategy,” this approach gives you short-term liquidity with stable long-term returns.