Savers have enjoyed high certificate of deposit rates over the past few years, thanks to the Federal Reserve’s efforts to snuff out sky-high inflation. Yet with the Fed expected to begin cutting rates soon, the era of ever-higher CD yields may be coming to a close.
The Fed recently said it has made tremendous progress in reducing inflation. As a consequence of rate cuts, CD interest rates are already heading lower once again.
Factors that influence CD rates
While each bank independently determines the CD yields it pays, several factors indirectly influence CD rates nationally. Elements such as economic growth, financial sector stability and inflation impact new CD yields.
The most significant influence is the federal funds rate — the interest rate banks charge each other for overnight loans. The Federal Reserve has raised this rate to multidecade highs to combat inflation. A side effect for consumers is that institutions have been paying considerably higher deposit yields.
Savers can take advantage of high rates by buying CDs. Unlike in traditional savings accounts, most CD yields are fixed for the entire term. Changes during a CD’s lifespan generally don’t affect its rate. Locking in a guaranteed yield for months or years makes CDs attractive.
When will interest rates go down?
Economists and investors disagree on how aggressively the Fed will cut interest rates. Yet there is a consensus expectation that the Federal Open Market Committee will begin cutting rates at its September 2024 meeting.
In his recent speech at the annual Jackson Hole Economic Policy Symposium, Fed Chair Jerome Powell hinted at a September rate cut. Powell said, “The time has come for policy to adjust.” He also said the Fed does “not seek or welcome further cooling in labor market conditions.”
The Fed will update its projections at its next meeting, which concludes on Sept. 18. Based on Powell’s language, the Fed will likely project multiple rate cuts by year’s end.
According to CME Group, the bond market is pricing in a 100% chance of at least a 25 bps rate cut in September and a more than 70% chance rates will drop by at least 1% by the end of the year.
Are CD rates going to go down?
If the bond market is correct, CD rates could soon start dropping fast and hard. Rates on most CDs have likely already peaked. Because the market for financial products is forward looking, future FOMC rate cuts are priced in before they happen.
Stephen Kates, certified financial planner and principal financial analyst for RetireGuide.com, said CD rates have been dropping since late 2023.
“As banks anticipated interest rates falling in 2024, the longer maturities offered lower interest rates so they would not be locked into paying more than they might earn years from now,” Kates said.
“Short-term yields on CDs have remained more stable but will begin falling more earnestly when the first rate cut happens in September.”
Long-term CD rate forecast
In June, the FOMC projected a long-term federal funds interest rate of 2.8%. That target rate implies interest rates could drop to 2.5% or less in the coming years. Falling rates will be great news for Americans with debt, but they will likely continue to drag down CD rates.
“With the Federal Reserve targeting a 2% inflation rate, 12-month CDs will likely approach this threshold to keep pace with annual inflation,” said Ben Hart, CFO at Texans Credit Union.
Hart said the yield curve will normalize over the next one to three years. The yield curve is a graph depicting the yields of debt instruments over a range of different maturity dates. “As the yield curve normalizes, longer-term CDs should offer higher rates than shorter-term ones, reversing the current trend where shorter-term CDs pay more,” Hart said.
If you’re looking to lock in guaranteed returns of 4% or higher over the next several years, now may be the time to buy a long-term CD. But make sure you will not need access to that money until the CD matures. Early withdrawal penalties can eat up your interest. In addition, consider the opportunity costs of locking up that money. A 4% return isn’t awe-inspiring compared to the roughly 10% historical annual average returns of the .
Average CD rates now
The average annual percentage yield as of August 19, 2024 on a one-year CD is 1.85%, according to the Federal Deposit Insurance Corp., while a five-year CD was 1.42%.
While those rates aren’t exactly robust, they’re well above historical levels. In January 2022, before the Fed started raising rates, a one-year CD yielded just 0.13%, while a five-year CD offered only 0.28%.
That said, even a tiny rate increase or cut can greatly impact long-term returns.
Example: Say you opened a five-year CD and deposited $10,000 in January 2022 that paid a 0.28% APY. After five years, you’d earn just a little more than $140 in interest. That same $10,000 would net more than $700 now.
These yields are just averages, and low ones at that. Many financial institutions have much higher CD yields.
Learn more: Use our CD calculator to see how much you could earn.
Why CD rates went up in 2022 and 2023
Interest rates rose steadily throughout 2022 after the Federal Reserve increased short-term borrowing costs from almost zero at the beginning of the year to a range of 4.25% to 4.50% by December to force sky-high inflation down. As of August 2024, the federal funds rate sat in the range of 5.25% to 5.50%. The Fed has not changed that target range in over a year.
Before the 2022 hikes, interest rates had been at extraordinary lows for most of the past decade. In the aftermath of the Great Recession in 2008, the Fed slashed borrowing costs to stimulate the economy.
But even as the economy recovered, interest rates and inflation remained low. While that was good news for borrowers, it meant dismal savings rates. Those with cash to put in CDs or other savings accounts struggled to generate interest income.
Quick tip. While high compared to the recent past, current CD yields are quite low, historically speaking.
What are the best CD terms and rates?
The best CD rates are above 5% APY for a one-year CD.
But keep in mind that CDs are intended to be held for the entire length of the term. When buying one, choose a term based on your personal financial situation. Remember, you won’t have fee-free access to your funds while they are in the CD.
You’ll also want to look ahead at where you expect CD rates to go. Experts expect rates to drop soon. In this case, a longer-term CD that locks in current rates may be more beneficial.
But if you are not comfortable losing access to your money for the CD’s duration, it may not be right for you. More liquid options include high-yield savings and money market accounts.
Where to find the best CD rates
Online banks tend to have the best CD rates. They don’t have to keep up with the overhead of managing brick-and-mortar branches. They’re also less well-known than the biggest traditional banks. Online banks often want to make a splash with customers, offering great yields to attract attention.
To make your search easier, here are the best CD rates by term:
- Best 3-month CD rates.
- Best 6-month CD rates.
- Best 9-month CD rates.
- Best 1-year CD rates.
- Best 18-month CD rates.
- Best 2-year CD rates.
- Best 3-year CD rates.
- Best 4-year CD rates.
- Best 5-year CD rates.
- Best 10-year CD rates.
Tips for choosing the best CD terms for you
Regardless of where CD rates are heading, you can take action to lock in an attractive rate right now.
- Consider what type of CD you want. You’ve got plenty of choices between traditional, no-penalty, bump-up, brokered, jumbo, and more. Choose a CD that best suits your financial goals.
- Pick the length. CDs come in a wide range of terms. When you select a term, you’re giving up access to your funds for that period. You may be able to cash out your CD, but only if you pay a withdrawal penalty. So ensure you’re comfortable with the term length of the CD you choose.
- Shop around. Some CDs offer higher rates than others. Comparison shopping can help you lock in the best CDs rate.
- Read the fine print. Before committing to a particular CD, remember to look for fees and penalties.
- Get insurance. Most CDs come with deposit insurance through the FDIC or the National Credit Union Administration. But it’s important to confirm your funds are protected before you sign up.
Frequently asked questions (FAQs)
CD rates ride national economic trends. When shopping around for a specific CD, you’ll see that the rates depend on the term, how much money you deposit and the bank you choose.
The Fed invariably cuts interest rates during recessions to get the economy humming. Those cuts result in lower interest rates on savings products, including CDs.
If you invest in a CD through a bank with federal deposit insurance, your CD is protected from bank failure up to $250,000 per depositor, per account type.
CDs also typically have a fixed interest rate, so you know what you will be earning during the set term.
Note that there are also brokered CDs that you can buy through investment firms. Brokered CDs follow different rules.
You should likely open both a CD and a savings account. While CDs generally offer higher rates, savings accounts are liquid, allowing free access to your money. Here are the best online savings accounts.
CD rates can change at any time and it’s not uncommon to see small fluctuations from month to month. Large changes in CD rates typically coincide with changes to the federal funds rate.
The prime rate is the interest rate banks charge borrowers with the highest credit scores. It is typically three points higher than the federal funds rate.
The prime rate doesn’t directly impact CD rates.
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