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:
As expected the Fed raised prime rates by another 0.25% at the culmination of their two day session on March 22, 2023 to put the overall federal funds rate at 4.75% – 5.00%.
On top of that, the CME FedWatch Tool now places a 47.9% chance on the Fed hiking rates by another 0.25% on their May 3rd meeting and a 51.5% chance they remain the same.
If the Fed goes ahead with another 0.25% in May, the Federal Funds rate would sit at 5.00% – 5.25%.
In this post you'll learn:
So When Will CD Rates Go Up?
CD rates are already on the rise in 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.
That said, the upward trend in CD and savings rates may not be a direct linear path.
In February 2023, for example, we saw a number of big name banks like Citibank, Capital One, Ally Bank, Synchrony, etc. launch 5.00% APY (annual percentage yield) CDs for the first time in over a decade – only to roll these back under the 5.00% APY mark following the Silicon Valley Bank news in March.
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 and second quarter of 2023 (at least) but will likely plateau at some point depending on when exactly the Fed stops raising rates. 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, the table below shows the CD rate changes we’ve tracked from the Feb 1st Fed rate hike to the March 22 Fed rate hike (both by 0.25%). This time frame includes the disruptive Silicon Valley Bank news.
|Institution||CD Rate Δ||Best APY|
|Capital One||down 0.70%||4.30%|
|PenFed Credit Union||no change||4.70%|
|Vanguard (brokered CD)||down 0.05%||5.30%|
|Edward Jones (brokered CD)||no change||5.00%|
|Fidelity (brokered CD)||no change||5.15%|
|Bread Savings||up 0.35%||5.10%|
|Synchrony Bank||no change||5.00%|
|Marcus by Goldman Sachs||up 0.25%||4.75%|
|Ally Bank||no change||5.00%|
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 March 22, 2023:
- 6 month CD rates – 0.97%
- 12 month CD rates – 1.49%
- 24 month CD rates – 1.41%
- 36 month CD rates – 1.31%
- 48 month CD rates – 1.25%
- 60 month CD rates – 1.35%
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 March 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 from the Fed’s February 1st rate hike to their March 22nd rate hike – both by 0.25%.
|Institution + Account||Rate Δ||APY|
|UFB Elite Savings||Up 0.47%||5.02%|
|First Foundation Bank Online Savings||up 0.30%||4.50%|
|Bask Bank High Interest Savings||Up 0.20%||4.45%|
|Capital One Performance 360||Up 0.10%||3.40%|
|Ally Online Savings Account||Up 0.20%||3.60%|
|PayPal high yield savings account||Up 0.25%||4.00%|
|SoFi Checking and Savings||Up 0.25%||4.00%|
Interest Rates Going Forward
During the March 21st and 22nd meetings, the Fed stated they may conduct more future rate hikes if needed but will keep a close eye on both inflation and the labor market. The Fed also noted that they will use “all of their tools” to keep the banking system safe.
Analysts are roughly 50/50 on there being another 0.25% rate hike during the Fed’s May 3rd meeting.
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 5.00% 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 5.00% 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 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 5.39% APY. Wells Fargo’s best CD rate to end last year was a 13 month promotional offer yielding 4.26% APY and Bank of America’s top rate was a “Featured CD” also with a 13 month term.
If the Fed raises rates again in May by 0.25% then it’s reasonable to expect top CD rates from the big banks along with online banks and credit unions to rise by another 0.25% – 0.50% APY, however, the impact won’t be immediate.
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, 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 March 22, 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 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.
Leave a Reply