If you’re looking to park some cash in a CD (certificate of deposit) then you’re probably wondering whether now is the right time to open it or if it will be possible to lock in higher rates sometime later this year.
While predicting anything in financial markets is nearly impossible, the general theory would be to keep your money in liquid accounts like a money market account or high yield savings account if you expect CD rates to go up – or – open a CD now if you believe they’re at their peak and are likely to come down.
Here’s what we know:
Following 7 rate hikes by the FED in 2022, the CME FedWatch Tool places a 97.2% chance on the FED hiking rates by 0.25% (and a 2.8% chance they raise them by 0.50%) at the culmination of their first meeting of 2023 on February 1st.
This would put the overall Federal Funds rate at 4.50% – 4.75%.
So When Will CD Rates Go Up?
CD rates are already on the rise to start 2023 and are expected to continue to do so, so long as the FED continues to raise the federal funds rate.
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 going to continue to affect the interest rates for other financial securities, including certificates of deposit (CDs), money market accounts, savings accounts, etc.
However, savers should keep their expectations in check, as rates on the savings side climb at a much slower pace than their counterparts on the loan side.
The difference in rates between what banks’ offer on their loans versus what they offer on their savings deposits is referred to as the “spread.” This is where banks generate their profit and also why mortgage rates are rising much faster than CDs and savings rates.
According to Freddie Mac, average 30-year fixed-rate mortgages rose from 3.45% in January 2022 to 6.27% in December of 2022.
By contrast, average 12 month CD rates only rose from 0.13% to 1.07% in that same time frame, according to the FDIC.
Will CD Rates Go Up in 2023
The general consensus among financial analysts and economists is yes, CD rates will continue to tick upward throughout the first quarter of 2023 (at least) but will likely plateau at some point. We should also note that the rise in CD rates in the first half of 2023 will be much softer than their rise was in the second half of 2022 when the FED was making a series of 0.75% rate hikes.
To get a better picture of how CD rates are moving to start the year, the table below shows the CD rate changes we’ve tracked following the most recent FED rate hike of 0.50% on December 14th of last year.
|Institution||CD Rate Δ||Best APY|
|Bread Savings||no change||4.50%|
|Edward Jones (brokered CD)||Down 0.05%||4.55%|
|Fidelity (brokered CD)||no change||4.65%|
|PenFed Credit Union||no change||4.35%|
|Capital One||no change||4.40%|
|Vanguard (brokered CD)||Down 0.05%||4.70%|
|Synchrony Bank||no change||4.60%|
|Ally Bank||Up 0.10%||4.35%|
|Marcus by Goldman Sachs||no change||4.40%|
To put these rate bumps and current best APYs (annual percentage yields) into perspective, below is the national average for CDs terms 6 months to 6 years according to FDIC data pulled January 19, 2023:
- 6 month CD rates – 0.81% (up from 0.65% last month)
- 12 month CD rates – 1.28% (up from 1.07% last month)
- 24 month CD rates – 1.21% (up from 1.06% last month)
- 36 month CD rates – 1.16% (up from 1.02% last month)
- 48 month CD rates – 1.11% (up from 0.97% last month)
- 60 month CD rates – 1.21% (up from 1.09% last month)
To get an idea of how fast these averages have been climbing, here are the national averages for 12 month CDs and 60 month CDs every month since the start of 2022 to the start of 2023:
|12 month CD avg.||60 month CD avg.|
Will Savings Account Rates Go Up in 2023
Yes, the average APY for all variable-rate accounts including online savings accounts, interest checking accounts and money market accounts will likely rise in the first part of 2023 as long as the FED continues to raise rates.
Here are some popular FDIC-insured online banks and their savings rates movements since the FED’s last rate hike on December 14th, 2022:
|Institution + Account||Rate Δ||APY|
|PayPal high yield savings account||Up 0.25%||3.75%|
|SoFi Checking and Savings||Up 0.25%||3.75%|
|UFB Elite Savings||Up 0.10%||4.21%|
|First Foundation Bank Online Savings||no change||4.00%|
|Bask Bank High Interest Savings||Up 0.12%||4.15%|
|Capital One Performance 360||no change||3.30%|
|Ally Online Savings Account||no change||3.30%|
Interest Rates Going Forward
During the December 14th meeting, the FED continued to reiterate their stance on raising rates to combat inflation. Future markets are only predicting a 0.25% rate hike (~97.2% chance) on February 1st with a much smaller chance of another 0.50% rate hike (~2.8% chance).
A Look at Certificates of Deposit
Certificates of Deposit (CDs) are deposit accounts held at banks or credit unions that provide fixed interest rates for a specific period of time. CDs differ from savings accounts 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 around 4.75% and inflation around 6.5%, CD investors, while earning some nominal rate of return, are still encountering a negative real rate of return.
The only time CD investors win big real rates of return is when they invest in a long-term CD when interest rates are extremely high, and then prevailing interest rates drop substantially (along with inflation) over the term of their CD deposit.
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.
Past Trends for CD Rates
Back in 2021 when inflation started to pick up, CD rates were still dropping. By the end of that year, the average rate for one-year CDs had dropped from 0.21% to 0.14% and the average rate for five-year CDs had fallen from 0.36% to 0.26%.
In 2022, however the FED became much more aggressive in their fight against an unrelenting rate of inflation and completely reversed their stance on rates making a total of 7 historic rate hikes unseen in decades.
This pushed CDs up in a major way, albeit it took quite a while for them (especially the large banks) to raise their rates for savers.
For example, while the average 12 month CD has yet to hit 1.50%, top yields from online banks are already creeping over the 4.50% APY mark for 12 month terms.
Bigger banks and older traditional banks are normally the slowest to raise rates for savers.
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 further dampen the direct effect of increases in the fed funds rate on CD yields.
All that to be said, in Q4 of 2022, even the largest banks in the country like Bank of America, Wells Fargo and Citibank had competitive CD rates on the menu for at least a couple of terms (mostly promotional options) with Citibank leading the way offering an 18 month IRA CD yielding 4.97% APY. Wells Fargo’s best CD rate to end last year was a 13 month promotional offer yielding 4.01% APY and Bank of America’s top rate was a “Featured CD” also with a 13 month term.
If the FED raises rates twice in Q1 of 2023 by 0.25%/each (0.50% total) it’s reasonable to expect top CD rates from the big banks along with online banks and credit unions to rise by 0.25% – 0.50% APY but the impact won’t be immediate.
Alternate Scenarios that May Impact CD Rates
There are, of course, at least two alternative scenarios regarding probable CD rates for 2023.
First, even if inflation continues to go higher, 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.
This seems unlikely though, as the FED has noted it won’t back down to some economic pain as long as employment stays relatively stable.
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 5-6% mark or more.
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.
With the futures market along with the FED’s messaging indicating smaller rate hikes in 2023, it’s not a bad idea to monitor CD rates periodically.
If you’re on the fence about opening a CD right now, you may also want to consider a variable-rate, high yield online savings account so that you can benefit from any future interest rate increases.
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.
Short-term US Treasury Yields are currently providing higher yields than CDs. Below are current US treasury yields available as of market close on January 18, 2023 (source).
This table shows an inverted yield curve – where short term interest rates are greater than long term interest rates – and it has become more pronounced in 2023.
In the past, this has been a successful indicator of a recession.
CD rates have also aligned with this trend as 12 month CD rates are now higher than 5 year CD rates on average for the first time since rates began to rise.
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 continue to tick upwards in 2023.
Below are frequently asked questions by consumers.
Do CD Rates Go Up with Inflation?
Generally speaking CD rates are not directly correlated with the rate of inflation.
That said, the measures the FED tends to use to address inflation – like quantitative tightening and raising prime rates – does put upward pressure on CD rates.
Do CD Rates Go Up with the Prime Rate?
The prime rate set by the FED is the primary factor banks and credit unions use when determining the rate to charge on a loan to consumers. It also impacts the rates they provide on deposit accounts such as CDs and savings accounts.
Banks and credit unions use this prime rate because it is the rate they are charged by The Federal Reserve to fund their loan products.
Do CD Rates Go Up During a Recession?
Usually no. The Federal Reserve’s primary lever used to deal with a recession is lowering prime rates. This happened in the 1980’s and more recently with the 2008 recession where rates dropped from over 5% to historic near zero lows. CD rates followed suit in both instances.
That said, consumers still tend to flock to CDs more so in uncertain economic times.