For the past year and a half, investors have watched certificate of deposit (CD) rates climb to levels not seen in decades. But after seeing the federal funds rate stabilize and CD rates stagnate towards the end of 2023, CD rate forecasts may look a bit different this year.
We spoke with experts and looked at the data to see where CD rates are likely to go throughout the rest of 2024. Take a look to see why these changes will affect your portfolio and how to make the smartest investment choices this year.
Understanding CD interest rates
When you open a CD, the interest rate determines the return you’ll receive. It’s most commonly expressed as annual percentage yield, or APY. The higher the APY, the more interest you’ll accrue over the life of the CD.
To give a simple example, if you deposit $1,000 into a 1-year CD with a 4.00% APY, you’ll earn $40 in interest for a final balance of $1,040.
CD rates change frequently in response to a number of influences, including the federal funds rate and decisions by individual banks.
Are CD rates going up?
CD rates began to rise steeply in mid-2022 in line with a series of hikes to the federal funds rate. However, this sharp incline in rates began to taper off towards the end of 2023, and they’ve remained relatively unchanged since December.
Currently, national average rates for a 1-year CD sit at 1.86% APY, up from 0.15% APY in April 2022. But with no change to rates since December 2023, it doesn’t appear rates will continue to go up, at least significantly.
CD rate trends and forecasts
As increases level off, CD interest rate forecasts for the coming year tend to lean towards an eventual decline in rates. This is largely due to cooling inflation and anticipated rate cuts by the Fed.
“What we’re seeing is that the market is acknowledging that we’ve reached peak federal funds rate and we’re likely to start coming back down the other side,” said Alison Staloch, CFO of investment platform Fundrise.
However, many experts believe it’s unlikely for rates to return to their 2022 levels right away.
“It’s more of a linear drop than any major exponential change,” said Staloch. “I don’t think we’ll see a rate drop in the next month or two. I think in all likelihood, in Q2 or at the latest Q3, we’ll definitely see some kind of rate drop before the election.”
Factors that influence CD rates
Federal funds rate
The federal funds rate is a key benchmark used by banks in setting their CD rates. When the federal funds rate goes up, banks will offer higher rates on CDs. These rates tend to drop when the federal funds rate falls again.
The federal funds rate is the rate at which banks lend money to each other and is set by the Federal Reserve.
Inflation
While inflation doesn’t impact CD rates directly, it does impact the federal funds rate, which in turn affects CD rates. When inflation rises, the Federal Reserve uses the federal funds rate as a tool to maintain economic stability. This usually means better returns on CDs during periods of inflation.
Competition between banks
CD rates are subject to price wars between banks, just like any other product being sold by a business. When competing banks raise their CD rates, the rest of the market may try to stay competitive with similarly attractive rates. This is why it’s important to shop around for the best rates before locking into a specific CD.
CD terms
The CD rate you get ultimately depends on the term you choose. APYs can vary widely across maturities at the same bank; for example, you may get an enormously different rate by choosing a 6-month CD over a 5-year CD. Rates may also be lower for certain specialized CDs in exchange for more flexibility, such as those with no penalty for early withdrawal.
How to maximize the benefits of current CD rates
Since CD rates are at or near the high we are expecting to see in the near future you may want to consider a CD with a longer term. Rates are expected to drop, so locking in the highest rate for as long as possible may be your best bet to maximize returns.
However, you may not feel comfortable locking away your money for years on end. If that’s the case, you may want to consider a CD ladder.
To build a ladder, start by opening a series of CD accounts with staggered maturity dates. By making funds available at regular intervals, you’ll maintain liquidity while maximizing overall returns.
After each CD in your ladder matures, you’ll have the opportunity to withdraw cash if needed, reinvest in a new CD, or allocate funds to a different investment offering better rates at that time.
Of course, it’s also crucial to compare rates at different banks in order to make sure you’re getting the best possible returns in the current market.
Finding the best CD rates
Since CD rates are set individually by banks, some offer much more attractive returns than others. But you may be surprised at just how vastly rates can change from bank to bank. For example, the current national average rate for a 1-year CD is 1.83% APY, but our analysis of the best 1-year CD rates found rates as high as 5.50% APY.
Generally speaking, online banks tend to offer better returns on CDs as they don’t face the same overhead expenses as traditional brick-and-mortar banks. As you compare rates across banks, make sure to include a variety of different financial institutions in your research, including online banks and credit unions.
The role of treasury bonds in CD rates
Treasury bonds are fixed-rate investments issued by the U.S. government that are often sold on the secondary market. Like CD interest rates, treasury bond yields tend to correlate with the federal funds rate. However, treasury bonds are also directly affected by investor demand.
Treasury yields have fallen in recent months from their peak in October 2023. Experts point to this decline as anticipatory of Fed rate cuts to come in 2024, and it could foreshadow a similar drop in CD rates in the approaching months.
Expectations for CD rates in 2024
Overall, experts predict CD rates to fall from their recent peak later in 2024 alongside anticipated rate cuts by the Fed. While it’s difficult to say exactly when rates will begin to drop, it seems everyone can agree on the best plan of action: start your research now and be ready to take action sooner rather than later.
“Look at your options and be prepared to execute,” said Staloch. “Once the Fed starts to bring interest rates down, I’d expect CD yields to start to drop quickly. You don’t want to be doing this analysis then.”
Frequently asked questions (FAQs)
Inflation is one of many factors that go into determining the federal funds rate. When inflation rises, the Fed may increase the federal funds rate in an effort to slow it down. Both prime rates and CD rates are affected by changes to the federal funds rate; prime rates will generally hover around 3% above the federal funds rate, while you’ll typically see more variance among CD rates from bank to bank.
Interest rates, including CD rates, typically fall during a recession. This is a consequence of the Federal Reserve lowering the federal funds rate in an effort to stimulate borrowing. While it does mean you’re likely to get a better rate on a loan, you should also anticipate lower CD yields during this time.
If you are anticipating rates going down, you’d want to invest in a longer-term CD in order to lock in the higher rates for as long as possible. But that means losing access to your funds.
A way to balance liquidity and APY is to create a CD ladder. To do this, you’ll need to open a series of CD accounts with staggered maturity dates. Once each account matures, you’ll have the option to roll your funds over into a new term or withdraw your cash for other purposes.
The Federal Reserve is responsible for determining the federal funds rate. Banks typically adjust their CD rates in line with fluctuations in the federal funds rate. When the Fed brings the rate up, CD rates tend to go up; when the federal funds rate goes down, CD rates tend to drop.
