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 1.41%, 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%.
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.
Although many investors had anticipated a rate cut in March, Fed Chair Jerome Powell recently suggested that a cut was unlikely that soon. This means that rates will remain high for a bit longer, but the exact length of time is uncertain. If the Fed starts reducing the federal funds rate in 2024, rates on everything from mortgage to CD rates will drop, so waiting to lock in rates could be a gamble.
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, which makes 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.
To better understand why now might be the time to grab that CD you’ve had your eye on, it helps to understand that CD rates have simply skyrocketed over the past year. 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.
Higher rates can, however, 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 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.
Why it's probably time to buy a CD
It’s unlikely that CD rates will continue to climb any higher. Now, you can lock in high rates on both short-term and long-term CDs. Waiting to open a CD could mean missing out on some stellar rates. Plus, you can score some serious interest just by opting to deposit a larger lump sum into your CD.
How much interest would I earn on a 1-year CD?
Amount invested
APY
Interest earned (compounded monthly)
$1,000
5.00%
$51.16
$1,000
5.25%
$53.78
$1,000
5.50%
$56.41
$5,000
5.00%
$255.81
$5,000
5.25%
$268.91
$5,000
5.50%
$282.04
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 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.
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.
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.
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.
The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Long-term CD rates might have peaked in October 2023
Since March 2022, the central bank has raised the federal funds rate 11 times — with several of the hikes being more aggressive at 50 and 75 basis points higher. But with inflation finally cooling, there's at least one future rate cut in the cards by the Fed.
At its January and March 2024 meetings, the FOMC held the federal funds rate steady at a target range of 5.25% and 5.50%, stating that inflation is still too high. While the Fed stated that rate cuts are expected to occur at some point this year, it will wait until inflation is under control.
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.
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.
What is a jumbo CD? A jumbo CD is similar to a regular CD, but it requires a higher minimum deposit. While a typical CD might require a minimum of $1,000 to open, a jumbo CD usually requires a minimum of around $100,000. Because of the high minimum deposit requirement, jumbo CDs don't make sense for a lot of investors.
What was the highest CD rate historically? According to the Federal Reserve, the highest CD rate was for a three-month CD term in December 1980, which reached an average of 18.65%.
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
How to avoid taxes on CD interest. One way to postpone being taxed on CDs is to put them in a tax-deferred individual retirement account (IRA) or 401(k). As long as money placed in a traditional IRA is below the annual contribution limit, interest you earn may be tax deductible.
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 March 19. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.
The Fed funds rate sets somewhat of a baseline for CD yields. Then, other factors – like risk – determine the yield for specific CDs. The Fed funds rate has historically had the strongest correlation with low-risk CDs.
The high CD rates at the end of the 1970s continued into the '80s in a big way. Average rates for 3-month CDs peaked at a staggering 18.65% in December 1980, according to the Fed. They remained in double digits for nearly two years before beginning a slide that saw them bottom out at 5.69% in October 1986.
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Introduction: My name is Maia Crooks Jr, I am a homely, joyous, shiny, successful, hilarious, thoughtful, joyous person who loves writing and wants to share my knowledge and understanding with you.
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