Over the past two years, interest rates on certificates of deposits (CDs) have increased substantially—in lock-step with the Fed’s rate hikes. The national deposit rate for 5-year CDs is 1.38%, up from less than 0.50% in June 2022. Yet many banks are offering rates well above that—some 5-year CDs have annual percentage yields (APYs) that exceed 4%, and some 1-year CDs are offering APYs well above 5%.
CD rates had been on the rise due to the Fed’s efforts to bring inflation down. However, now that inflation has declined—from more than 9% year-over-year in the summer of 2022 to slightly more than 3% now—the Fed is planning to put the brakes on rate hikes, with plans to reduce the rate three times this year.
So, should you open a CD now or wait? It could very well be the time to buy, especially since the Fed has indicated it will likely stop raising rates and start cutting them in 2024.
What happens when the Fed raises rates
Interest rates are the Fed’s number-one tool for fighting inflation. It raises rates to cool consumer spending, which decreases demand for good and services. Higher rates, on the other hand, reduce demand and inflation.
For example, rising rates send mortgage rates higher, making it more expensive to buy a home. Credit card APRs also tend to increase, making it more expensive to carry a balance month-to-month.
Rising rates tamp down on consumer demand and increase borrowing costs for companies. This can, in turn, cause unemployment to soar as companies may resort to layoffs in response to declining revenue.
A look at CD rates since June 2022
Higher rates have big benefits for savers. Savings account and CD APYs tend to rise alongside the federal funds rate. If you’re in a position to save in today’s higher interest rate environment, investments like CDs could help accelerate your savings.
CD rates have skyrocketed over the past two years: 1-year CD rates have increased more than seven-fold, with 3-year and 5-year CDs up nearly four-fold and three-fold, respectively.
Rates will remain high for a bit longer, but it’s unclear how long. The Fed has indicated that there will three rate cuts in 2024, which means it’s unlikely that CD rates will continue to climb . Waiting to open a CD could mean missing out on some stellar rates.
Now, you can lock in high rates on both short-term and long-term CDs and, you can score some serious interest just by opting to deposit a larger lump sum into your CD.
The tables below show examples of top rates by term length. The notes column provides some of the qualifications needed to get a CD but contact the institution to receive the most up-to-date information. Rates are updated weekly on Wednesdays.
Another strategy could be to buy a 1-year CD every month and build a CD ladder. With a CD ladder, you can lock in some high APYs and stretch those top-notch yields a bit longer while having more liquidity.
CD rates tend to track the federal funds rate. If the Fed rate goes up, CD rates increase, and vice versa. The Federal Reserve has held the federal funds rate steady since September of last year. This will likely continue until inflation cools, at which point experts anticipate rate cuts.
Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on April 30. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.
Waiting to open a CD could mean missing out on some stellar rates. Now, you can lock in high rates on both short-term and long-term CDs, and you can score some serious interest just by opting to deposit a larger lump sum into your CD.
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
The national average yield for five-year CDs at the end of the year will be 1 percent APY, McBride predicts, with top-yielding five-year CDs paying 4 percent APY. The national average rate for one-year CD rates started out at 1.07 percent in 2023, and it rose to 1.73 percent by the end of the year.
If your goal is to lock in a high rate of interest on funds you don't need to access for a period of time, a CD might be your best option. However, a high-yield savings account may be the better choice if you want to earn solid interest on your savings while still keeping the money relatively accessible.
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
CD accounts earn less on average than the stock market and mutual funds. That's the trade-off of getting a guaranteed return versus the unpredictable swings of market investments. When you lock in a CD rate, it might not grow your money enough during high inflation periods when prices are going up.
What is a jumbo CD? A jumbo CD is similar to a regular CD, but it requires a higher minimum deposit. While a typical CD might require a minimum of $1,000 to open, a jumbo CD usually requires a minimum of around $100,000. Because of the high minimum deposit requirement, jumbo CDs don't make sense for a lot of investors.
Plenty of banks and credit unions are offering CDs paying 5.00% APY or more. To earn an account's advertised APY, you'll often have to meet any account minimums. Some CDs have no minimum opening deposit requirement, but it's not uncommon to see CD minimums of $500 to $2,500 or more.
CD rates reached a historical high of 18.65% in December 1980. As inflation continued and unemployment rose, the country faced a major recession from July 1981 to November 1982.
Higher inflation has led to higher rates for savers, resulting in substantial returns for high-yield savings and certificates of deposit (CD) accounts.
This rate decreased twice during the pandemic and reached an all-time low, but it has increased 11 times since March 2022. As of January 2024, the Federal Reserve's target range was 5.25% to 5.50%. Some CD rates are currently as high as 5.51%, but yields are expected to begin declining in 2024.
CD rates can be influenced by numerous factors, including the current economic climate, inflation and market dynamics. For example, when inflation is low, interest rates tend to be lower.
Fixed-rate CDs are less vulnerable to the ups and downs of the stock market. CDs are generally considered low-risk because you get the return of your principal along with any interest accrued at the end of your term.
Introduction: My name is Stevie Stamm, I am a colorful, sparkling, splendid, vast, open, hilarious, tender person who loves writing and wants to share my knowledge and understanding with you.
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