Lower CD rates could result from anticipated reductions in the federal funds rate. Following its meeting on January 30-31, the Federal Reserve opted to maintain the federal funds rate at its current level.
This is the third consecutive Fed meeting in which a rate rise has not taken place. From March 2022 to July 2023, there were eleven rate hikes. At this point, the Fed rate is at its highest position in almost 20 years, ranging from 5.25% to 5.50%.
Commercial banks borrow and lend money to one another using this rate, which was last raised on July 26. It was a 25 basis point, or 0.25 percentage point, rise.
Although it doesn't directly affect certificates of deposit rates, this rate may have an indirect impact on them. You may notice higher CD rates in the wake of a Fed rate increase. Here is a more detailed look by Notebanks at its operation.
Certificates of Deposit: At Least 4% APY
The best short-term CDs (six to eighteen-month durations) have rates above 5%, while the most competitive rates on CDs for three- to five-year terms continue to be above 4% annual percentage yields.
The rate on CDs hasn't been this high in a long time, and the rate spike from January 2022 to the current levels can be partially explained by the Fed's repeated rate hikes. The credit unions and online banks typically have the highest rates. The high CD rates, however, might not rise much further, and if the Fed decides to lower its rate, they might begin to decline shortly after.
Rising Fed Rates Translate Into Higher CD Rates
The federal funds rate is a crucial rate that the Federal Reserve, as the nation's central bank, can affect to maintain economic stability. This is about what it costs for an overnight cash loan between banks.
Usually, the Federal Reserve hikes rates to combat inflation and lowers them to aid in economic stimulation. When it comes to determining the interest rates on loans and savings accounts, including recently issued CDs, banks typically follow the path of the Fed funds rate. Thus, although it's not a given and takes time, higher Fed rates can lead to higher CD rates.
Are Interest Rates on CDs Increasing?
No, is the succinct response. According to our analysis, online banks and credit unions, which offer some of the highest CD rates, started gradually lowering their rates in January 2024.
Study up on the Most Recent CD Rates
Rates have slowed for a large portion of the banking sector since they started rising in 2022. Based on a study of Federal Deposit Insurance Corp. rate data, the national average CD rates for maturities ranging from one to five years continue to be more than 1.40%.
In the meantime, regardless of changes in the Federal Reserve rate, some of the biggest US banks have seldom changed their basic CD rates in years.
CDs Versus Savings Accounts
Higher rates for CDs and normal savings accounts may result from a rate increase by the Federal Reserve, but which one to use when will depend on the variations between these accounts.
Typically, the rate on a standard savings account is variable, meaning it might fluctuate. When the interest rate rises, your money might earn more, and when it falls, it might earn less. This account offers a flexible option to accumulate savings because you can add or withdraw money as needed. View the most recent rates on high-yield savings accounts.
Typically, a CD has a set rate. When you open a CD, you commit an initial payment for a term that typically lasts between three months and five years at a single interest rate. Although CD rates are typically greater than those of traditional savings accounts, you forfeit your right to access your money in a CD until the end of the term unless you pay an early withdrawal penalty.
CDs are useful for accumulating money for a sizable down payment on a home or car, or just as a low-risk location to store some cash that you'll need in the future. Find out when buying CDs is worthwhile.
1. Check out CDs at Credit Unions or Banks Online
While every bank sets its CD rates, only a select few provide high-return CDs. Because they do not incur the expenses of operating a branch network, online-only financial institutions can offer greater rates than traditional brick-and-mortar banks. View the most competitive CD rates.
2. Take Into Account CD Ladders or Longer CD Periods
The general rule is that rates increase with the length of the CD period. In comparison to six-month to one-year CDs, longer can indicate four- to five-year CDs. However, keep in mind another trend: the penalty for an early withdrawal increases with the length of the term. Interest accrued over days, months, or even years typically serves as the penalty.
A CD ladder is one option if you desire high rates and continuous access to some money in CDs. By opening several CDs with different maturity dates, you can choose to withdraw or reinvest the money when each CD matures.
3. Examine CDs That Are Step-up or Bump-Up
Not all banks offer these two types of CDs, although they both permit interest rate increases during the term.
With step-up CDs, the bank sets the schedule for when increases happen, usually on a predetermined basis. You can ask for a rate rise with bump-up, or raise-your-rate, CDs.