[Update May 2022: The next FED meeting is scheduled for May 3rd and 4th. Traders are pricing in a 75% chance of a move upwards by 0.50% according to CNN. If that happens it would be the first time the FED has moved rates up by a half percent since May of 2000.]
The Federal Reserve Open Market Committee last announced an interest rate increase of 0.25% following its last meeting back on March 16th. Since then we’ve seen a rise in CD rates and variable rate savings accounts, money market accounts and interest checking accounts.
That’s the first time in nearly four years that the Fed has hiked, rather than lowered, interest rates – which could mean good news for savers as 2022 continues.
Since the Fed’s base federal funds rate for overnight loans to banks sets the benchmark for all other interest rates in the United States, the Fed’s policy shift is likely to affect the interest rates for other financial securities, including certificates of deposit (CDs).
The change in policy was a consensus decision – the only dissenting vote, by St. Louis Fed President James Bullard, wasn’t a vote against raising rates, but rather a vote for an even higher rate hike of 0.50% rate.
The Committee also stated the Fed’s intention to start unwinding its massive QE holdings, stating, “In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities”.
Will CD Rates Go Up in April 2022
The general consensus among experts is a resounding yes, CD rates will continue to tick upward this month and throughout the rest of the year – albeit slowly to start.
APYGUY has already noted a number of CD rate increases from online banks, traditional banks, credit unions and brokered CDs this month.
Here are some noteworthy movements in CD rates we’ve covered after the last FED meeting:
| Institution | CD Rate Δ | Best APY |
| PenFed Credit Union | Up 0.10% – 0.50% | 1.85% |
| Ally Bank | Up 0.10% – 0.20% | 1.0% |
| Capital One | Up 0.10% – 0.80% | 2.0% |
| Synchrony Bank | Up 0.10% – 0.50% | 1.50% |
| Marcus by Goldman Sachs | Up 0.35% – 0.95% | 2.15% |
| Comenity Direct | Up 0.30% – 0.50% | 1.40% |
| Edward Jones (brokered CD) | Up 0.50% – 0.80% | 3.05% |
| Fidelity (brokered CD) | Up 0.30% – 1.70% | 3.25% |
| Vanguard (brokered CD) | Up 1.0% | 3.0% |
To put these rate bumps and current best APYs into perspective, below is the national average for CDs terms 6 months to 6 years according to recent FDIC data:
- 6 month CD rates – 0.10%
- 12 month CD rates – 0.17%
- 24 month CD rates – 0.22%
- 36 month CD rates – 0.25%
- 48 month CD rates – 0.26%
- 60 month CD rates – 0.32%
The averages listed above have risen between 0.01% – 0.03% from April to May of this year.
Will Savings Account Rates Go Up in May 2022
Yes, the average APY for all variable-rate accounts including online savings accounts, interest checking accounts and money market accounts will undoubtedly rise. Perhaps not across the board, but most will, and the average(s) will certainly go up.
Many banks and credit unions have already raised the rates on their variable rate savings accounts since the March FED meeting.
If the FED raises rates by the likely 0.50% during the May meetings, then we expect a widespread upward movement of savings rates from most major banks and credit unions.
Here are some of the noteworthy upward movements on yields we’ve covered since the last FED meeting:
| Institution + Account | Rate Δ |
| Citi Accelerate Savings | Up 0.10% |
| Robinhood Cash Management | Up 0.20% |
| Bask Bank High Interest Savings | Up 0.10% |
| Synchrony Bank High Yield Savings | Up 0.10% |
| First Foundation Bank Online Savings | Up 0.05% |
We also saw new accounts hit the market this year. Most notably SoFi’s Checking and Savings account featuring an APY up to 1.0% as well as PayPal’s soon-to-launch high yield savings account featuring an APY of 0.60% (you can only join the waiting list as of May 2022).
Unpacking the Federal Reserve’s Policy Change
The 0.25% interest rate hike in March of 2022 came as no surprise to most analysts and investors. The driving force behind the Fed’s change of direction is the rapidly rising inflation rate – sitting at a harsh 7.9% as of last month, and giving every indication of going higher. The statement from the Fed also noted its concern about the possible economic impact of Russia’s invasion of Ukraine, noting that the invasion may “create additional upward pressure on inflation”.
However, the inflation rate had already surged to 6.9% in December of 2021. Many analysts viewed the statement on Russia to be nothing more than the Fed trying to help the Biden administration deflect responsibility for rapidly rising prices. Consumers have been hit hard by things such as gas prices surging to $6 a gallon in California and over $4 a gallon, on average, nationwide.
In addition to raising interest rates, the Fed downgraded its prior projection for 2022 GDP economic growth of 4%. The forecast now is for only a 2.8% increase in GDP. Some stock market analysts think that even a projection of 2.8% may be overly optimistic, that the US economy is in real danger of slipping into a recession.
Interest Rates Going Forward
The Fed’s statement also announced that it anticipates doing six more rate hikes in the rest of 2022. That’s double the three interest rate increases it had previously forecast. The statement declared that the federal funds rate is likely to rise to nearly 2% by the end of the year. However, if inflation continues moving sharply higher, then the Fed may resort to larger rate hikes. So, that 2% end of year forecast might easily rise to 3% or higher.
The last time that the Fed raised interest rates, in 2018, it quickly reversed itself when the economy showed signs of weakening. But back in 2018, inflation wasn’t racing toward the 10% level. With rate increases as virtually its only tool to stem the rising tide of inflation, it’s unlikely that such a quick policy reversal will happen this time. However, the Fed is now stuck between the fact that interest rate increases may put the brakes on inflation, but also run the risk of slowing down economic growth.
It’s worth noting that, since its inception in 1913, the Federal Reserve has an abysmal track record in regard to taming inflation. In 1913, one US dollar could buy you 30 Hershey’s chocolate bars. These days, unless they’re on sale, a dollar won’t even buy you one. To put another way, it now takes more than $30 to purchase the amount of goods and services that could be bought with a single $1 bill in 1913. The Fed showed no ability to control runaway inflation in the 1970s and appears to have been taken by surprise by the high price increases in 2021.
A Look at Certificates of Deposit
Certificates of Deposit (CDs) are essentially an alternative type of savings account, one that is popular with many investors. CDs differ from a regular bank or credit union savings account in two primary ways:
- CDs are time deposits – that is, the money put into a CD is set to remain invested for a specified period of time, such as six months, a year, three years, or five years. Investors can withdraw their funds early, but incur an early withdrawal interest rate penalty for doing so.
- The interest rate earned with a CD is usually a fixed rate, while the interest rate paid on a regular savings account is commonly a variable rate. There are variable rate CDs available, but the vast majority are fixed rate.
CDs are favored by investors with a low risk tolerance, as they are considered one of the safest types of investments, being insured by the Federal Deposit Insurance Corporation (FDIC) just like other deposit accounts at a bank.
The downside of CDs is the fact that their real rate of return rarely keeps pace with inflation. Case in point: with even the best current CD rates at barely over 1%, and inflation at just a hair less than 8%, CD investors, while earning some nominal rate of return, are losing substantial purchasing power over time. The only time CD investors win big is when they invest in a long-term CD when interest rates are extremely high, and then prevailing interest rates drop substantially over the term of their CD deposit. Such a period last occurred in the late 1970s, when prevailing rates fell from over 13% in 1979 to less than 4% in 1983.
However, most CD investors readily accept the reality of relatively low real returns. They are typically much more concerned with having a safe investment that earns some rate of interest than they are with having a growth investment that stands a good chance of being able to outpace inflation.
CD investors have garnered one benefit in recent years as the competition between financial institutions for investor deposits has heated up. This has led to some financial firms offering significantly higher returns on CDs than others. For example, in mid-2021, Synchrony Bank was offering a 13-month CD rate that was more than 1% higher than the best comparable CD rates being offered by the five biggest banks in the US.
Past Trends and Future Projections for CD Rates
Throughout 2021, even as inflation climbed higher, CD rates dropped lower. By the end of the year, the average rate for one-year CDs had dropped from 0.21% to 0.14%. The average rate for five-year CDs fell from 0.36% to 0.26%.
But with the Fed finally beginning to raise rates and forecasting more rate hikes throughout 2022, CD rates should also finally be turning to the upside. (At 0.14%, there isn’t much room left to the downside.) In the past, the interest rates paid on CDs have risen roughly in tandem with increases in the fed funds rate. That is, an interest rate hike of 0.25% has usually translated – eventually – into a similar rate hike for CDs. Based on that, a cumulative 2% rate hike by the Fed by the end of the year should put the highest yielding CDs at slightly over 3%.
However, even in a new, rising rate environment, Bankrate’s chief financial analyst, Greg McBride, cautions that banks may be a bit stingy with interest rate increases. According to McBride, “Most banks, and big banks in particular, are sitting on a pile of deposits and will be very hesitant to pass along higher yields to savers if they don’t need more deposits.” That fact may dampen any direct effect of increases in the fed funds rate on CD yields.
Alternate Scenarios that May Impact CD Rates
There are, of course, at least two alternative scenarios regarding probable CD rates for the remainder of the year.
First, even if inflation continues to soar, if the economy begins to stall out significantly, sparking fears of a recession or even a depression, then the Federal Reserve may alter its policy and change course yet again. It may postpone further rate hikes, or even abandon them altogether and turn back to cutting rates.
There is some historical precedent for such a path. When the Fed last embarked on a sustained campaign of interest rate hikes, between 2015 and 2017, even though it eventually made more than 20 rate hikes, virtually none of them occurred in 2016. The Fed postponed planned interest rate increases until December of 2016 in the face of a weakening economy. If a similar scenario should begin to unfold in 2022, then the Fed’s stated intention to increase rates six more times this year may be cast aside. With fewer rate hikes – or none at all – CD investors may not see interest rates reach much higher than 1-2%.
The other possible scenario is that inflation keeps increasing unabated, pushing the Federal Reserve into making more and/or higher interest rate hikes. In that event, the best available CD rates could well crest the 4% mark.
How to Find the Best Interest Rates on CDs
There are a number of banks that offer interest rates that are significantly higher than the average rate, on both savings accounts and CDs. The trend in recent years has shown the best CD interest rates tend to be offered by the growing number of “online only” banks. Since they don’t have the massive overhead expense of physical branch offices to contend with, online banks have more free cash flow that they can use to entice depositors by offering higher yields on CDs. Among the banks offering the highest CD yields recently are Bread Financial (formerly Comenity Direct), Barclays, Synchrony, and Marcus by Goldman Sachs.
With the Fed forecasting several more interest rate hikes in 2022, it’s not a bad idea to check CD rates after every Fed meeting. And if you’re considering putting money into a CD right now, you may also want to consider a high yield online savings account so that you can benefit from any future interest rate increases. Alternatively, you might consider only investing in short-term, six-month CDs, hoping to have the opportunity to reinvest six months from now for a higher yield.
Alternatives
You may be able to earn higher returns while still holding investments that are considered very safe by making investments in alternatives to CDs.
One such alternative is a money market account. Some money market accounts pay higher interest rates than most CDs. They also offer the flexibility that CDs lack, as you can withdraw your money any time without suffering any interest rate penalty.
Another alternative investment is a tax-free municipal bond. Being tax-free already gives such an investment an advantage over a CD. You can also get a much higher return on investment (ROI) with municipal bonds, many of which are currently paying interest rates above 5%. Municipal bonds are not quite as safe an investment as CDs, but while the possibility of the bond issuer defaulting on interest rate payments does exist, such defaults have, historically, been very rare.
One often overlooked alternative investment, one that’s perfectly safe and tax-free, is, instead of depositing money in a certificate of deposit, using the money to pay down high interest rate debt, such as credit cards. Paying off the balance on a credit card that charges 19% annual interest has the same net effect on your finances as earning a 19% return on investment – with the added benefit that making such a move doesn’t incur any tax liability, thus, making for a 19% tax-free return on investment.
CD Rates Moving Forward – Summary
The short and sweet of it is that, given the Federal Reserve’s current stance on interest rates, the best CD yields should most likely rise significantly in 2022, by at least a percentage point or two.
However, it’s unclear as to exactly how much they’ll rise because of other economic factors that may impact interest rates. Additionally, the historical trend of CD rates failing to outpace inflation is likely to continue.
Note – Compounding Returns: Whenever one of your CDs matures, you can choose to pocket the earned interest and just reinvest the principal amount. However, you can get the benefit of compounded returns by reinvesting the total of your original principal, PLUS the interest you earned. For example, if you invest $1,000 in a five-year CD paying 3% interest, at maturity your CD will have earned $159.27 in interest. If you reinvest just the $1,000 principal, then you will again earn $159.27 interest in five years. However, if you invest your principal amount and your earned interest – $1,159.27 – then at the end of the next five years, you will have earned $343.91 in interest. That’s more than double the $159.27 you earned the first five years. Roll it all over again, and the next five years will earn you $557.96 in interest.
