|CD Term||Last week’s maximum national rate||Highest national rate this week||Change|
|3 months||4.25% annual return||4.25% annual return||No change|
|6 months||4.25% annual return||5.00% APR||+0.75%|
|1 year||4.84% annual return||4.84% annual return||No change|
|18 months||4.60% annual return||4.61% annual return||+0.01%|
|2 years||4.94% annual return||4.94% annual return||No change|
|3 years||4.99% annual return||4.99% annual return||No change|
|4 years||4.99% annual return||4.99% annual return||No change|
|5 years||4.99% annual return||4.99% annual return||No change|
|10 years||4.00% APR||4.25% annual return||+0.25%|
The Fed’s November 2 federal funds rate hike was its sixth hike this year and fourth consecutive 0.75% hike, which is a historically large hike for the Fed. As a result, CD rates have skyrocketed dramatically since March and are likely to rise further in 2023.
Rates since the end of last year have not only gone up, but multiplied, with many of this week’s best CD yields being four to five times what the best certificates were paying in early 2021. Take CD 3 years old, for example. The highest December rate on a 3-year CD available nationally was 1.11%. Today, the highest-paying 36-month certificate commands a rate of almost 5%.
Please note that the “top rates” quoted here are the highest nationally available rates that Investopedia has identified in its research of daily rates at hundreds of banks and credit unions. This is very different from the national average, which includes all banks that offer a CD with that term, including many large banks that pay a pittance in interest. So national averages are always pretty low, while the highest rates you can find when shopping around are often 10-15 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. One of the main outcomes of the eight meetings throughout the year is the Fed’s announcement of whether it will raise, lower, or not change 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 out their excess reserves overnight. However, when the federal funds rate is somewhat above zero, it provides an incentive for banks to view consumers as a potentially cheaper source of deposits, which they then try to attract by raising savings, money market, and savings rates. of CD.
At the start of the pandemic, the Fed announced an emergency rate cut to 0% as a way to help the economy avoid financial disaster. And for two full years, the fed funds rate stayed at that zero level.
But in March 2022, the Fed kicked off a 0.25% rate hike, signaling it would be the first of many. For the May 2022 meeting, the Fed was already announcing a second hike, this time of 0.50%. But both hikes were just a prelude to four larger 0.75 percentage point hikes the Fed announced in mid-June, late July, mid-Sept. 21, and Nov. 2.
The Fed’s next regularly scheduled rate announcement will be made on December 14.
What is the expected trend for CD rates?
The Fed’s five rate hikes this year are just the beginning. Raising rates is one way to fight inflation, and with US inflation still exceptionally high, the Federal Reserve publicly plans to implement additional rate hikes through 2022 and probably 2023.
While the Federal Reserve rate doesn’t affect long-term debt like mortgage rates, it does directly influence the direction of short-term consumer debt and deposit rates. So with more 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 makes short-term certificates worth considering so you can capitalize on the higher rates that will be available in the not too distant future. Or consider “up your rate” or “step up” CDs, which allow you to trigger a rate increase on your existing CD if rates rise significantly.
Disclosure of fee collection methodology
Every business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers nationwide and determines the daily rankings of the highest-paying certificates for each major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions) and the minimum initial CD deposit must not exceed $25,000.
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