What Fed Rate Increases in 2023 Mean for CDs - NerdWallet (2024)

The Federal Reserve decided to keep the federal funds rate the same after its Dec. 12-13 meeting, making this Fed meeting the fourth to not result in a rate increase since early 2022. There have been 11 rate increases since March 2022, and the Fed rate is currently in the range of 5.25% to 5.50%, its highest point in more than 20 years.

The last increase of this rate, which is what commercial banks use to borrow and lend money to one another, occurred July 26. That increase was 25 basis points, or 0.25 percentage point.

This rate doesn’t directly raise or lower rates on certificates of deposit, but it can affect them indirectly. When there’s a Fed rate increase, you might see higher CD rates. Here’s a closer look at how it works.

Certificates of deposit: 4% APY or higher

The most competitive rates on CDs for three-month to five-year terms remain above 4% annual percentage yields, with the best short-term CDs (six to 18-month terms) above 5%. CD rates haven’t been this high in years, and multiple Fed rate increases help explain how rates skyrocketed from being around 1% or lower in January 2022 to their current heights in 2023. The highest rates tend to be at online banks and credit unions.

Fed rate increases mean higher CD rates

As the U.S. central bank, the Federal Reserve tries to keep the economy steady using an important rate it can influence: the federal funds rate. This is roughly the cost of borrowing cash overnight between banks. Typically the Fed lowers its rate to help stimulate the economy and raises it to help curb inflation.

Banks generally follow the direction of the Fed funds rate in setting their rates on loans and savings accounts, including newly issued CDs. So a higher Fed rate can result in higher CD rates, but it’s not guaranteed and doesn’t happen instantly.

Rising CD rates might make CDs an option to consider if your current savings account rates are near 0% and not helping to fight inflation in any sense. Inflation, or the rate at which the price of goods and services increases, has changed the savings habits of about seven in 10 savers, according to NerdWallet’s 2022 report.

Are CD interest rates rising?

The short answer is yes. Online banks and credit unions have some of the highest CD rates — with some one-year rates reaching 5% APY and above — and they've dramatically increased yields since mid-2021, according to a NerdWallet analysis. See more about current CD rates.

For much of the banking industry, rates started rising in 2022. National average CD rates for one- to five-year terms have climbed above 1%, according to a NerdWallet analysis of rate data from the Federal Deposit Insurance Corp. Meanwhile, some of the largest U.S. banks have barely moved their CD rates for years, regardless of Fed rate increases or decreases.

Note: CD rate changes impact only new CDs available at banks and credit unions, not existing CDs you have. Step-up and bump-up CDs are the two exceptions. Skip to more on these two types of CDs.

Savings accounts vs. CDs

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. Your money may earn more interest when the rate rises and less interest when the rate drops. Since you can add or withdraw money over time, this account provides a flexible way to build up savings. See the latest high-yield savings account rates.

A CD generally has a fixed rate. When you open a CD, you lock up an upfront sum of money at one interest rate for a term usually ranging from three months to five years. CD rates tend to be higher than regular savings account rates, but in exchange, you lose access to money in a CD until the term ends unless you pay a penalty to withdraw early.

CDs can be good for setting aside a sum earmarked for a large future purchase, such as a car or house, or simply as a low-risk place for some savings you’ll need years from now. Learn more about when CDs are worth it.

Why did my bank raise CD rates but not mine?

A bank will generally change rates on newly issued CDs over time, but CDs that customers already opened don’t have rate changes. The main exceptions are step-up and bump-up CDs, which are structured for potential rate increases during a term.

How to find high CD rates

1. Check out CDs at online banks or credit unions.

Every bank sets its CD rates, but only some have high-yield CDs. Online-only institutions can afford to offer higher rates than brick-and-mortar banks since they don’t have the costs associated with managing a branch network. See the best CD rates.

2. Consider longer CD terms or a CD ladder.

The standard trend is the longer the CD term, the higher the rate. Longer can mean four- to five-year CDs compared to six-month to one-year CDs. Bear in mind, though, another trend: The longer the term, the higher the penalty for an early withdrawal. The penalty is usually interest earned over a number of days or months, or even years.

If you want both ongoing access to some money in CDs and high rates, you might opt for a CD ladder. This involves opening multiple CDs with staggered end dates, allowing you to choose to reinvest or withdraw funds after each CD matures. Learn more about CD ladders.

3. Consider step-up or bump-up CDs.

These two types of CDs allow for an interest rate increase during the term, but not every bank offers them. Step-up CDs give the bank control over when increases occur, generally on a fixed schedule. Bump-up, or raise-your-rate, CDs give you the ability to request a rate increase. Learn more about step-up and bump-up CDs.

Keep an eye on CD rates

CDs can be a great way to set aside some savings for a near-future goal. And although each Fed rate increase might not lead to dramatic changes, it's still a good idea to monitor your bank or credit union’s response and compare it with those of other banks and credit unions. In addition, see other ways to save without a savings account.

Other ways to save

As you factor CDs into your savings strategies, consider looking into high savings account rates as well as bank bonuses, which can be for checking or savings accounts. If you want a broader overview of account options, here's a guide to multiple ways to earn more interest.