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.
Just like mortgage rates, savings rates and credit card interest rates, CD rates correlate strongly with the federal funds rate. When the Federal Reserve increases its benchmark rate, interest rates across the economy, including CD rates, increase.
"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."
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.
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.
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.
"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%."
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 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.
When you open a CD, you lock in the interest rate for the entire term. If you open a CD when rates are low and rates then rise in a big way, it may be worth breaking your CD to secure a higher rate. For example, let's say that breaking your current CD will result in a $25 early withdrawal fee.
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
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.
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.
Currently, no U.S. banks or credit unions are offering 7% APY on CDs. During August 2023, a few credit unions were offering 7% interest on CDs, but those were limited-time offers that are no longer available.
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.
CD rates are largely influenced by the federal funds rate. As such, the banks are more willing to offer a high rate on a short-term CD because they're more likely to turn a profit due to the elevated federal funds rate.
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