If you’re looking to park some cash into a CD (certificate of deposit) then you’re probably wondering whether now is the right time to open one or if CD rates will continue to rise throughout the year – perhaps providing an opportunity to obtain better rates in the near future.
While predicting anything in financial markets is nearly impossible, generally speaking, if the Fed continues to raise prime rates, banks and credit unions will continue to raise their rates.
On the loan side we saw it quickly as mortgage rates, auto loan rates, credit card rates, etc. shot up in the second half of 2022 at a breakneck pace to keep up with the Fed’s series of 0.75% rate hikes. On the savings side, however, things moved much slower – but still in the upward direction.
As of the second quarter of this year, the Fed has moved to a less hawkish stance on rate hikes with most analysts expecting rates to stay where they are for the time being and potentially decline towards the end of the year.
All that to be said, below is an overview of where we think CD rates are headed in the near term and throughout 2023.
Interest Rates Going Forward
During the May 2nd and 3rd meetings, the Fed stated that they will determine whether or not more rate hikes are needed by looking at incoming economic data (namely inflation data and the jobs report). This is different language than what they used in their last meeting where they stated that they “anticipated more rate hikes will be needed” suggesting that interest rates may stay put for the near term.
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.
Will CD Rates Go Up in 2023
So far, CD rates have continued their ascent in 2023 but they may be nearing a peak and/or plateau for the months of June and July.
- The next Fed meeting is June 15th with a 75% probability of no rate hike and a 25% probability of a 0.25% rate hike.
- The Fed meetings in July will culminate on the 26th with a probability of 45% that rates remain the same as they are today, a 45% chance they’re up 0.25% and a 10% chance that they’re up 0.50% (source).
To get an idea of how CD rates moved following the Fed’s 0.25% rate hike on May 3rd take a look at the table below. This shows the change in the best CD rates offered by well known banks, credit unions and brokerages from May 3rd to June 1, 2023.
|Institution||Best CD Rate (May 3)||Best CD Rate (June 1)|
|PenFed Credit Union||4.70%||4.70%|
|Vanguard (brokered CD)||5.15%||5.50%|
|Edward Jones (brokered CD)||5.10%||5.25%|
|Fidelity (brokered CD)||5.10%||5.35%|
|Marcus by Goldman Sachs||4.75%||5.05%|
To put these CD rates into perspective, below is the national average for CDs terms 6 months to 5 years according to FDIC data pulled June 1, 2023:
- 6 month CD rates – 1.19%
- 12 month CD rates – 1.59%
- 24 month CD rates – 1.45%
- 36 month CD rates – 1.36%
- 48 month CD rates – 1.30%
- 60 month CD rates – 1.37%
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 June of 2023:
|12 month CD avg.||60 month CD avg.|
📌 Please note For the first time since the Fed began hiking rates in March of last year, the average CD rate for 5 year terms did not rise month over month, indicating a plateau may be forming for longer term CDs.
Will Savings Account Rates Go Up in 2023
Variable rate savings account rates and money market rates have been on the rise this year as well, but are showing signs of plateauing as well.
To get a better sense of how they’ve moved since the Fed’s last rate hike, here are some popular FDIC-insured online banks and their savings rate movements since the Fed’s latest rate hike on May 3, 2022.
|Institution + Account||Rate Δ||APY|
|UFB Elite Savings||no change||4.81%|
|First Foundation Bank Online Savings||up 0.35%||4.85%|
|Bask Bank High Interest Savings||no change||4.75%|
|Capital One Performance 360||up 0.15%||3.90%|
|Ally Online Savings Account||up 0.10%||3.85%|
|PayPal high yield savings account||no change||4.15%|
|SoFi Checking and Savings||no change||4.20%|
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 CD rates around 5.00% and inflation around 6.04%, 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 2.00% even after 10 straight rate hikes by the Fed, top yields from online banks are already creeping over the 5.00% APY mark for ~12 month terms.
Why is this?
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 Q1 of 2023, 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 5.72% APY. Wells Fargo’s best CD rate is a 13 month promotional offer yielding 4.76% APY and Bank of America’s top rate is a “Featured CD” with an APY up to 4.50%.
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 futures market indicating smaller rate hikes in 2023 as well as a plateau sometime later in the year, 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 May 31, 2023 (source).
This table shows an inverted yield curve – where short term interest rates are greater than long term interest rates, but it has leveled out some since our last update in early February.
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 have been higher than 5 year CD rates since December of last year.
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 may already be here. It is possible that we see some upward movement by individual banks and credit unions based on their own deposit needs and requirements but don’t expect much more than a 10-25 BPS raise from the best APYs (annual percentage yields) found today.
Below are frequently asked questions by consumers.
Will CD Rates hit 6.00% APY?
There are currently no FDIC-insured CDs on the market providing a 6.00% APY for any term. And given the Fed’s stance on rate hikes moving forward, we don’t foresee CD rates hitting that mark in 2023.
The closest CD rates we’ve seen to the 6.0% APY mark are the brokered CDs at Vanguard which provide a yield of 5.50% APY for 13-18 month terms and a 5.45% APY CD from Nasa Federal Credit Union that comes with a 15 month term and requires a minimum deposit of $10,000 in new money to the credit union.
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.