Certificate of deposit (CD) rates have risen significantly since 2022 – in lockstep with Fed rate hikes. The national deposit rate for 5-year CDs is currently 1.43%, up from less than 0.50% in June 2022. Yet many banks are offering rates well above that – the best 5-year CDs have an annual percentage yield (APY) of over 4%, and some 1-year CDs offer APYs well over 5%.
CD rates had risen due to the Fed’s efforts to reduce inflation. However, as inflation has slowed – from more than 9% in the summer of 2022 to about 3% now – the Fed is keeping its interest rates between 5.25% and 5.5%, as they have been since July 2023. However, depending on inflation rates, there is a possibility of a cut as early as the next meeting in September.
So if you have a CD now or wait– It could well be a good time to buy, especially as many speculate that the Fed may cut interest rates at its next meeting.
What happens if the Fed raises interest rates?
Interest rates are the Fed’s primary tool for fighting inflation. It raises interest rates to dampen consumer spending, which in turn reduces demand for goods and services. Higher interest rates, on the other hand, reduce demand and inflation.
Rising interest rates, for example Mortgage interest rates Interest rates are also higher, which makes buying a home more expensive. Credit Card APRs Interest rates also tend to rise, making it more expensive to carry the balance over from month to month.
Rising interest rates dampen consumer demand and increase borrowing costs for businesses. This, in turn, can lead to a rapid rise in unemployment as companies may lay off workers in response to falling revenues.
A look at CD rates since June 2022
Higher interest rates bring great advantages for savers. saving account and APYs for CDs tend to rise in line with the prime rate. If you can save in today’s higher interest rate environment, investments like CDs could help you accelerate your savings.
CD rates have skyrocketed since 2022: Interest rates for 1-year CDs have increased more than twelvefold, with 3-year-olds and 5-year CDs by almost six or five times.
Why it’s probably time to buy a CD
Rates will stay high for a while, but it’s unclear how long. The Fed has indicated that a rate cut could still happen in 2024, meaning CD rates are unlikely to rise any further. If you wait to open a CD, you could miss out on some excellent rates.
Now you can lock in high interest rates on short-term and long-term CDs, and earn significant interest simply by making a large lump sum payment into your CD.
What should I consider before opening a CD?
Before you invest, compare prices and Compare the best CD rates offered by various banks and credit unions. It is possible that you will not find the best interest rates at your current bank. Currently, short-term CDs – such as 6 months and 1-year CDs—offer higher interest rates than their longer-term counterparts.
The tables below show examples of the best interest rates by term. See the notes column for some of the requirements needed to get a CD, but check with the institution for the most current 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 high APYs and stretch those premium returns a little longer while having more liquidity.
Taking away
With inflation and the Fed’s benchmark interest rate still high, now may be the time to put some money into CDs, especially longer-term accounts, since their fixed annual percentage rate won’t change even if rates are cut later in the year.