Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed’s rate hikes. The national deposit rate for 5-year CDs is 1.39%, 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, as inflation has slowed—from more than 9% in the summer of 2022 to 3.5% now—the Fed is holding steady with interest rates between 5.25% to 5.5%, the same as it has been since July of 2023. However, there is a chance a cut could be coming later in the year.
Insights from Charlie Ripley, Senior Investment Strategist for Allianz Investment Management
“Ultimately, [the recent] policy decision was a well-rounded approach to give the Fed more time to gain confidence in the path of inflation, but we suspect they remain ready to cut knowing that the interest rate curve has remained inverted for the longest period on record.”
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 may cut the rate before the end of 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, too, 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.
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 since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
Why it's probably time to buy a CD
Rates will remain high for a bit longer, but it’s unclear how long. The Fed has indicated that a rate cut may still be coming 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.
What to consider before opening a CD
Before investing, shop around and compare the best CD rates offered at various banks and credit unions. It's possible you won't find the best rates at your current bank. Currently, short-term CDs—like 6-month and 1-year CDs—offer higher rates than their longer-term counterparts.
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 daily but are subject to change.
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.
The takeaway
Since inflation and the Fed rate remain high, now may be the time to put some money away into CDs, especially longer-term accounts, since their fixed APY won’t change even if interest rates are cut later this year.
Based on trends in the market for fed-funds futures, the rate could end the year between 4.5% and 4.75%. That's good news for savers: The longer the Fed keeps short-term rates high, the longer banks are likely to keep savings and CD yields high.
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.
"CD rates will most likely drop and drop substantially in 2024," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "The biggest reason is the likelihood of Federal Reserve rate cuts later this year."
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.
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.
According to the FDIC, the average rate for a 12-month CD is 1.80% as of May 2024. So, yes, 6% CD rates are excellent. If you can get reliable 6% CD rates over a long period, then you should lock the rate in as long as possible.
7% Interest Savings Accounts: What You Need To Know
As of May 2024, no banks are offering 7% interest rates on savings accounts.
Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
"Shorter CD rates won't collapse and will still offer far higher yields than the ones we experienced in 2021 and prior years," Krumpelman says. "Even in 2025, we expect short CDs to pay more than 3%."
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
While you'll miss out on interest for the remainder of the term, if you can lock in a higher rate, this is probably beneficial. But consider if your CD has an early withdrawal penalty, and how much interest you'll need to pay, to see if a new CD rate can help you earn a big enough return to justify paying the penalty.
Since inflation and the Fed rate remain high, now may be the time to put some money away into CDs, especially longer-term accounts, since their fixed APY won't change even if interest rates are cut later this year.
Key takeaways. The national average rate for one-year CD rates will be at 1.15 percent APY by the end of 2024, McBride forecasts, while predicting top-yielding one-year CDs to pay a significantly higher rate of 4.25 percent APY at that time.
A jumbo CD is a certificate of deposit that traditionally requires a minimum deposit of $100,000. Some banks and credit unions offer jumbo CDs with lower minimums, such as $25,000. If that sum is far higher than the right amount for you to put into CDs, you can skip these CDs.
The inflation news, however, could be a boost for savers. Higher inflation has led to higher rates for savers, resulting in substantial returns for high-yield savings and certificates of deposit (CD) accounts.
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 since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
Short-term CD rates are more competitive than long-term ones because there's an inverted yield curve. You might still prefer a long-term CD if you want to lock in a rate for a few years because savings rates are good overall.
Introduction: My name is Allyn Kozey, I am a outstanding, colorful, adventurous, encouraging, zealous, tender, helpful person who loves writing and wants to share my knowledge and understanding with you.
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