[📌 Update July 28, 2022: At the culmination of the their two day meeting on July 27th, the FED did what most economists had predicted and raised prime rates by another 0.75%. This is the second time they’ve raised rates by 0.75% this summer and the futures market is already split on either another 0.75% or a 0.50% hike when they meet again this September. CD rates and variable rate online savings accounts and money market accounts have already seen their APYs (annual percentage yield) rise quite substantially since the FEDs first 0.75% bump and we fully expect the upward pressure to continue throughout the remainder of the year. Read more below.]

The Federal Reserve Open Market Committee announced another interest rate increase of 0.75% following its most recent meeting on July 27, 2022.

This is the second consecutive 0.75% prime rate hike the FED has made this summer. When they initially raised rates by 0.75% in June it was the first rate hike of its kind since 1994.

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 continue to affect the interest rates for other financial securities, including certificates of deposit (CDs).

The Committee also stated the Fed’s intention to start unwinding its massive QE holdings with quantitative tightening (the opposite of quantitative easing – which we’ve seen over the last several years), 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 August and September 2022

The general consensus among financial analysts and economists is a resounding yes, CD rates will continue to tick upward throughout August and September as well as the rest of the year.

APYGUY has already noted a number of CD rate increases from online banks, traditional banks, credit unions and brokered CDs.

Here are some noteworthy movements in CD rates we’ve covered since the FED began raising rates in May.

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 – 0.22%
• 12 month CD rates – 0.31%
• 24 month CD rates – 0.43%
• 36 month CD rates – 0.47%
• 48 month CD rates – 0.45%
• 60 month CD rates – 0.57%

The averages listed above are increasing with every update the FDIC makes. In July alone they have risen across the board by up to 0.10%.

Will Savings Account Rates Go Up in July and August 2022

Yes, the average APY for all variable-rate accounts including online savings accounts, interest checking accounts and money market accounts will undoubtedly rise.

Many banks and credit unions have already raised the rates on their variable rate savings accounts since the May FED meeting.

If the FED raises rates by either 0.50% or 0.75% in July and then again in September, then we expect a widespread upward movement of savings rates from most, if not all, major banks and credit unions.

Here are some of the noteworthy upward movements on yields we’ve covered over the last two FED meetings:

We also saw new accounts hit the market this year. Most notably SoFi’s Checking and Savings account featuring an APY up to 1.80% as well as PayPal’s high yield savings account featuring an APY of 1.40% which launched in May 2022.

Unpacking the Federal Reserve’s Policy Change

The 0.75% interest rate hike in June and July of 2022 came as no surprise to most analysts and economists mainly due to inflation ranging from 8.6% to 9.1% during this time.

The Board of Governors of the Federal Reserve System voted unanimously to approve this 0.75% increase – putting the interest rate paid on reserve balances at 2.20%, effective July 28, 2022 (see press release).

The FED also maintains the goal of getting maximum employment while taming inflation to a moderate 2%.

Interest Rates Going Forward

The Fed’s statement also indicated they plan on doing more rate hikes throughout the rest of 2022.

Futures markets are currently split on another 0.75% or a 0.50% hike during the FED’s next meeting in September.

For the September meeting, the futures market is about evenly split on a 50-point hike versus another 75-pointer.

— Eddy Elfenbein (@EddyElfenbein) July 27, 2022

Market pricing currently sees the Fed moving to a policy rate around 3.70% by the end of the year (source) and may easily exceed 4.0% in 2023.

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 topping 8%. This time around the FED is more willing to allow some economic pain to achieve lower inflation rates and more price stability.

It’s worth noting that, since its inception in 1913, the Federal Reserve doesn’t have the best 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.

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 as it provides a fixed interest rate for a fixed period of time. 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 2.50%, and inflation at just a hair above 8.5%, 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 months as the competition between financial institutions for investor deposits have heated up. This has led to some financial firms offering significantly higher returns on CDs than others.

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. With the current average yield for a 12 month CD sitting at just 0.21% APY, 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 key rate of between 3.50% and 3.75% by the Fed by the end of the year should put the highest yielding CDs comfortably over 4.0% APY.

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.

However, this may be offset by the quantitative easing the FED is embarking on to unload their balance sheet. This means less ‘free-money’ for banks to loan out from the FED and a stronger demand for consumer deposits from these institutions.

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 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 and turn back to cutting rates.

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% 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. 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.

Treasury Yields

Short-term US Treasury Yields are also up substantially since this time last month, however, longer term yields are down slightly. Below are current US treasury yields available as of market close on July 27, 2022 compared to July 5, 2022 (source).

We should also note that the top yields from FDIC-insured or NCUA-insured banks and credit unions are no longer beating US treasury yields for shorter terms of 1 year or less. This wasn’t the case to start the month of July.

That said, banks and credit unions tend to be slower to raise their rates.

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 will continue to rise significantly throughout the remainder of 2022.

FAQs

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.