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.
The Federal Open Markets Committee sets the federal funds rate—also known as the federal funds target rate or the fed funds rate—to guide overnight lending among U.S. banks. It's set as a range between an upper and lower limit. The federal funds rate is currently 5.25% to 5.50%.
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.
A Fed rate hike can lead to higher rates for regular savings accounts and CDs, but the differences between these accounts can impact which to use and when. A regular savings account usually has a variable rate, meaning it can change.
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.
"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."
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
Can You Get 5% on a CD? 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.
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.
They offer a guaranteed return over a set period with no chance of market-based losses. In exchange, they offer less liquid access to your cash than a savings account and lower long-term returns than the stock market. For this reason, CD accounts shouldn't take up all your money.
For context, in 2021, when rates were around their lowest, the national average 12-month CD had an APY of just 0.15%. For a $5,000 deposit, this is the difference between earning $250 in interest over a year versus earning only $7.50 over that same time frame.
The FRED database shows that December 1980 had the highest average three-month CD rate of 18.65%. As a time of high inflation, the early 1980s featured historically high rates that were often in the double digits.
CDs have a typical minimum balance or opening requirement that's often around $1,000, but it can range from $0 to $10,000. There are jumbo CDs with minimums traditionally around $100,000, though these CDs don't necessarily have the best rates in the industry.
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.
If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.
The Fed kept its rate the same after its third meeting of 2024 on April 30-May 1. 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.
How does raising interest rates help inflation? The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.
Introduction: My name is Pres. Carey Rath, I am a faithful, funny, vast, joyous, lively, brave, glamorous person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
