Interest rates on certificates of deposit (CDs) have been rising steadily in the past year, thanks to the Federal Reserve’s efforts to curb inflation by hiking the federal funds rate. However, experts predict that CD rates will not see much change for the rest of 2023, as the Fed may pause or slow down its rate increases.
How CD Rates Are Affected by the Fed
The Federal Reserve, or the Fed, is the central bank of the United States. It sets the federal funds rate, which is the interest rate that banks charge each other for overnight loans. The federal funds rate influences other interest rates in the economy, such as those for mortgages, credit cards, and savings products like CDs.
When the Fed raises the federal funds rate, it makes borrowing more expensive for banks and consumers. This can help slow down inflation, which is the general rise in prices of goods and services over time. Inflation can erode the purchasing power of money and hurt savers.
To attract more deposits from savers, banks may increase the interest rates they offer on CDs and other savings accounts. This way, they can lend out more money at higher rates and make more profits.
How CD Rates Have Changed in 2023
According to data from the Federal Deposit Insurance Corporation (FDIC), the average annual percentage yield (APY) for a one-year CD was 0.13% in January 2022, a record low since the FDIC started tracking CD rates in 1984. By July 2023, the average APY for a one-year CD had risen to 1.72%, a significant increase.
Other CD terms also saw similar increases during the same period. For instance, the average APY for a five-year CD went up from 0.28% to 1.37%.
Some banks offer even higher CD rates than the national averages. For example, U.S. Bank offers up to 4.95% APY for a 11-month CD with a minimum deposit of $1,000. Raisin, an online platform that connects savers with partner banks across Europe and the US, offers up to 5.00% APY for a one-year CD and up to 4.00% APY for a five-year CD.
How CD Rates May Change in the Future
Many experts believe that CD rates will not change much for the remainder of 2023 and into 2024. This is because they expect the Fed to pause or slow down its rate hikes, as inflation shows signs of cooling and economic growth moderates.
According to a recent Bankrate survey, 78% of economists expect that Fed rate cuts won’t begin until 2024. If this is the case, CD rates will likely remain stable or slightly higher for the next several months at least.
Billy Cho, market leader at Citi, says: “Based on the recent trends we have been seeing, as well as the anticipated rate movements for the remainder of the year that experts are forecasting, we expect CD rates to largely remain consistent, or at most, slightly higher, for the remainder of 2023.”
Jill Fopiano, president and CEO at O’Brien Wealth Partners, agrees: “The path of CD rates will mirror the action of the Fed. If they pause in hiking, CD rates are likely to remain at or near current levels. It is unlikely they will drop until the Fed begins cutting rates.”
Ben McLaughlin, US president at Raisin, advises savers to act now and lock in some of the attractive high-interest CDs that are currently available before rates start going down: “What we are seeing indicates that savers should research and lock in some of the attractive high-interest 12- and 24-month CD rates that are currently available before rates ultimately start going down.”
How Savers Can Benefit from CDs
CDs are savings products that offer a fixed interest rate for a fixed term. Savers agree to deposit their money with a bank for a certain period of time, usually ranging from a few months to several years. In return, they receive a guaranteed return on their money when the CD matures.
CDs are ideal for savers who want to earn a higher interest rate than a regular savings account and who don’t need access to their money during the term of the CD. CDs are also safe investments, as they are insured by the FDIC up to $250,000 per depositor, per account ownership type, per financial institution.
However, CDs also have some drawbacks. Savers may face penalties if they withdraw their money before the maturity date of the CD. Also, CDs may lose value over time if inflation rises faster than the interest rate of the CD.
Therefore, savers should consider their financial goals and risk tolerance before investing in CDs. They should also compare different CD rates and terms from various banks and platforms to find the best deal for their needs.