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.
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.
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.
"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."
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.
If the return on an investment does not at least keep up with the rate of inflation, it will result in the loss of purchasing power over the long term. Currently, rates on CDs barely exceed the Consumer Price Index (CPI) rate. CD rates tend to track the CPI, which should alleviate concerns over inflation risk.
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.
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.
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.
Jones adds that, within most two-year timeframes, CDs will also get you the highest fixed yield in most circ*mstances. "Plus, with the interest rate cut talk, if rates are lowered, you'll be glad to have locked in a higher rate," he says.
7% Interest Savings Accounts: What You Need To Know
As of April 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.
Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
As rates drop, banks can also cut back on the interest they pay to savers. So you'll typically see lower rates for deposit accounts, including savings accounts, CD accounts and money market accounts, during a recession.
And when the Fed raises its target rate, banks typically follow suit and increase their interest rates—including those on CDs. That's because when the Fed's target rate goes up, the cost of borrowing from other banks increases.
This higher interest rate cycle has been good news for CDs. As the Fed pushed rates up, certificates of deposit earned more. A 12-month CD was earning 1.49% monthly interest in March 2023. A year later, the same term CD is paying 1.81%. The best CDs are around 5% APY.
Higher inflation has led to higher rates for savers, resulting in substantial returns for high-yield savings and certificates of deposit (CD) accounts. For those considering CDs, Thursday's news just reiterated that now is a great time to act.
The consolation prize for savers is that the longer inflation stays above the Fed's target, the longer the Fed will keep the federal funds rate high—and the longer CD rates will stay elevated as well.
Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.
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