|CD duration||Last week’s best national rate||Best national rate of the week||To change|
|3 months||3.00% APY||3.00% APY||No change|
|6 months||3.58% ABS||3.58% ABS||No change|
|1 year||4.00% APY||4.00% APY||No change|
|18 months||4.00% APY||4.00% APY||No change|
|2 years||4.11% APY||4.25% APY||+0.14%|
|3 years||4.22% ABS||4.22% ABS||No change|
|4 years||4.32% ABS||4.32% ABS||No change|
|5 years||4.42% ABS||4.42% ABS||No change|
The Federal Reserve’s hike in the federal funds rate in September was its fifth increase this year and the third consecutive increase of 0.75%, which is a historically large increase for the Fed. As a result, CD rates have risen significantly since March and are expected to rise further in 2023.
Rates since late last year haven’t just climbed, they’ve multiplied, with many of this week’s top CD yields being three or nearly four times what the top CDs were paying at the start of 2021. Take 3-year-old CDs, for example. The highest rate on a 3-year CD available nationally was 1.11% at the end of December. Today, the most profitable 36-month certificate shows a rate of 4.22%.
Note that the “highest rates” quoted here are the highest rates available nationwide that Investopedia has identified in its daily search of rates from hundreds of banks and credit unions. This is very different from the national average, which includes all banks offering a CD with this term, including many large banks that pay paltry interest. Thus, the national averages are always quite low, while the best rates you can find while shopping are often 10 to 15 times higher.
The Federal Reserve and CD rates
Every six to eight weeks, the Federal Reserve’s rate-setting committee holds a two-day meeting. A key outcome of the eight meetings throughout the year is whether the Fed announces whether to raise, lower, or hold the federal funds rate.
The federal funds rate does not directly dictate what banks will pay customers for CD deposits. Instead, the federal funds rate is simply the rate that banks pay each other when they borrow or lend their excess reserves overnight. However, when the fed funds rate is above zero, this induces banks to view consumers as a potentially cheaper source of deposits, which they then try to attract by raising savings, money market and interest rates. some CDS.
At the start of the pandemic, the Fed announced an emergency rate cut to 0% to help the economy avoid financial catastrophe. And for two full years, the fed funds rate has stayed at that zero level.
But in March 2022, the Fed launched a 0.25% rate hike and signaled it would be the first of many. As early as the May 2022 meeting, the Fed was already announcing a second hike, this time of 0.50%. But these two hikes were just a prelude to three larger hikes of 0.75 percentage points announced by the Fed in mid-June, at the end of July and, most recently, on September 21.
The next regular Fed rate announcement will be November 2.
What is the expected trend for CD rates?
The Fed’s five rate hikes this year are just the start. Raising rates is a way to fight inflation, and with US inflation still exceptionally high, the Fed publicly plans to implement additional rate hikes through 2022 and likely through 2023.
Although the Fed rate does not impact long-term debt like mortgage rates, it does directly influence the direction of short-term consumer debt and deposit rates. So, with further increases likely, one could reasonably predict that CD rates will rise further this year and next.
That doesn’t mean you should avoid locking a CD now. But it’s worth considering shorter-term certificates so you can capitalize on higher rates that will become available in the not-too-distant future. Or consider “increase your rate” or “increase” CDs, which allow you to activate a rate increase on your existing CD if rates increase significantly.
Disclosure of rate collection methodology
Each business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers nationwide and determines the daily ranking of the highest-paying certificates for each major term. To qualify for our listings, the institution must be federally insured (FDIC for banks, NCUA for credit unions) and the minimum initial CD deposit must not exceed $25,000.