Interest rates, including CDs (certificates of deposit), mortgages, and credit cards have all been on the rise in 2023 and look poised to continue to do so through the remainder of the year.
With 3 more Fed meetings left in 2023 (September, November and December) there’s a chance the Fed will lift rates again in at least one of them.
And even if the Fed keeps rates where they stand now – between 5.25% and 5.50% – banks and credit unions may still lift their CD and savings rates throughout the remainder of the year as they continue to absorb the new high rate environment.
CD Rate Trends Following Last Fed Meeting
The last Fed meeting was held on July 26 and 27 where they raised rates by 0.25% to the current 5.25% to 5.50% level. The next Fed meeting is going to be held on September 20th and 21st where there is a 97% chance the Fed keeps rates the same and a 3% chance they lift them by another 0.25% [source]. Following the Fed’s September meeting, is the November 1st meeting where the odds of a 0.25% rate hike climb to 35.3% before rising to 37% in the final Fed meeting of the year on December 14th.
To get an idea of how much CD rates could rise throughout the remainder of 2023, let’s take a look and see how much they have risen following the most recent rate hike by the Fed on July 27th of 0.25%.
The table below shows a number of well known institutions offering federally insured CDs (certificates of deposit) along with the changes in their best CD rates following the Fed’s most recent rate hike on July 27th to the time of this writing on September 14, 2023.
|Institution||Best CD Rate (July 27)||Best CD Rate (Sep. 14)||Difference|
|PenFed Credit Union||4.90%||4.90%||+0.00%|
|Vanguard (brokered CD)||5.60%||5.75%||+0.15%|
|Edward Jones (brokered CD)||5.30%||5.50%||+0.20%|
|Fidelity (brokered CD)||5.35%||5.50%||+0.15%|
|Marcus by Goldman Sachs||4.85%||5.10%||+0.25%|
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 September 14, 2023:
- 6 month CD rates – 1.34%
- 12 month CD rates – 1.76%
- 24 month CD rates – 1.50%
- 36 month CD rates – 1.40%
- 48 month CD rates – 1.34%
- 60 month CD rates – 1.41%
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 end of September, 2023:
|12 month CD avg.||60 month CD avg.|
Will Savings Account Rates Go Up in 2023
Variable rate, online savings accounts and money market rates have been on the rise this year as well.
To get a better sense of how these rates have been trending, here are some popular FDIC-insured, online bank accounts and their APY (annual percentage yield) movements since the Fed’s latest rate hike on July 27th to the time of this writing.
|Institution + Account||APY (July)||APY (Sep.)||Rate Δ|
|UFB Priority Savings||5.06%||5.25%||+0.19%|
|First Foundation Bank Online Savings||5.00%||5.00%||+0.00%|
|Bask Bank High Interest Savings||4.85%||5.00%||+0.15%|
|Capital One Performance 360||4.30%||4.30%||+0.00%|
|Ally Online Savings Account||4.00%||4.25%||+0.25%|
|PayPal high yield savings account||4.30%||4.30%||+0.00%|
|SoFi Checking and Savings||4.40%||4.50%||+0.10%|
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.
One of the downsides to CDs is that their real rate of return doesn’t always keep up with the pace of inflation. When the rate of inflation is higher than the best CD rates, you’re left with a negative ‘real rate of return.’
The good news for savers, however, is that the current rate of inflation is 3.70%, while the top CD rates on the market are closing in on 5.75% APY – putting the real rate of return in positive territory for savers, which hasn’t happened in quite some time.
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 5.84% 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 4.60%.
Alternatives to CDs
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.
The best CD rates have caught up with short-term US Treasury Yields. Below are current US treasury yields available as of market close on September 13, 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 rates may already be here. If the Fed raises rates in September as is currently expected then we could see CD rates tick upward again by another ~0.25%, inching the best CD rates up to the 6.00% APY mark, but likely not past it.
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 an APY (annual percentage yield) of 6.00% on any term. However, given the Fed’s current stance on interest rates, if they decide to increase rates by another 0.25% before the year is over, then we may see the very best CD rates on the market hit 6.00% APY or within a few BPS of it.
The closest CD rates we’ve seen to the 6.00% APY mark are the brokered CDs at Vanguard which provide a yield of 5.75% APY for 13-18 month terms and a 5.65% APY CD from Nasa Federal Credit Union that comes with a 9 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.