CD rates ticked down slightly this week but remain at elevated levels not seen in over a decade, as investors keep a close eye on the Federal Reserve’s next policy move.
Leading CD Rates Dip But Offer Attractive Yields
The top nationally available CD yielded 5.75% APY as of February 2nd, according to data from Investopedia. While this represents a 0.05% dip from the prior week’s high of 5.80%, it still offers an attractive rate in the current rising rate environment. In fact, 5.75% handily beats the average savings account rate of 2.25%, providing over 3 times the amount of interest.
As the below table shows, many top CD rates remain elevated across various terms:
| CD Term | Highest Nationally Available Rate |
|---|---|
| 6 months | 5.75% APY |
| 1 year | 6.00% APY |
| 3 years | 5.60% APY |
| 5 years | 5.30% APY |
Savers looking to lock in yields may want to consider shorter-duration CDs, as the Fed is expected to start cutting rates at some point in 2024. A 6-month or 1-year CD ensures you lock in an elevated yield for the near term.
How High Could CD Rates Go?
CD rates have risen in tandem with the Fed’s rate hikes over the past year. The central bank raised its benchmark rate 7 times in 2022 and once already in 2023, bringing the target fed funds rate to a range of 4.5% to 4.75% currently.
Additional hikes could push CD yields even higher, but the pace is expected to slow. Markets are pricing in just 1 or 2 more quarter-point hikes for the remainder of 2023.
| Date | Fed Funds Rate Midpoint |
|---|---|
| Current | 4.625% |
| End of 2023 Est. | 4.875% to 5.125% |
This means top CD rates likely have limited room left to rise substantially. Investors expecting the high water mark within the next 1-2 Fed moves may want to consider locking in now.
How Long Will High CD Rates Last?
The big question facing savers now is how long these elevated CD rates will persist before the inevitable decline begins. History shows CD yields plunge when the Fed starts cutting interest rates, which markets expect by mid-2024.
In each of the past 3 rate hike cycles, CD rates started falling within months after the final Fed hike:
| Fed Hike Cycle | Final Hike | Months Till Peak CD Rates |
|---|---|---|
| 2004-2006 | June 2006 | 5 months |
| 2015-2018 | Dec 2018 | 3 months |
| 2022-2023 | Est. Mar 2023 | ? |
If this time follows the same pattern, savers likely have only until summer or early fall to grab high yields. Rates should taper slowly at first but likely cascade lower as 2024 progresses.
The speed and magnitude of declines depends heavily on the timing of Fed cuts and how fast they reduce rates. Markets expect cuts to begin around mid-2024, but the timing is far from certain. The best advice now is to take advantage of high CD rates, particularly shorter-term offerings, before the inevitable drop.
Which Banks Offer the Top CD Rates?
Many online banks and credit unions are offering attractive CD yields to customers nationwide right now.
As mentioned above, the highest nationally available 6-month CD rate of 5.75% APY is from Capital One 360. Several other large digital banks like Synchrony Bank, Marcus by Goldman Sachs, Ally Bank and CIBC also offer 6-month CD rates at or above 5%.
For 1-year terms, CIT Bank edges out the competition at 6% APY currently. But many rivals like Marcus, CIBC, Sallie Mae Bank and others are within a few basis points.
Generally the highest CD rates across various terms come from lesser known credit unions and regional banks. But the major national players are offering yields not far behind.
Maximize CD Returns With Laddering
Savvy investors can maximize returns by CD laddering – spreading funds across multiple CDs with staggered maturity dates.
For example, you could open 4 quarterly-renewing CDs each year for the next 5 years. Every 3 months, one of those CDs would mature, at which point you could withdraw the money or renew at the latest rate.
Benefits include:
- Ability to steadily access funds every quarter without paying early withdrawal fees
- Consistently capitalize on rising rates instead of getting stuck at lower legacy yields
- Reduce reinvestment risk as only a portion of the portfolio matures each quarter
- Smooth overall returns by mitigating impact from rate swings in any single period
In today’s rising rate environment, laddering provides valuable flexibility to capitalize on higher yields over time. Investors unsure how long this CD window will last can use laddering to gradually rotate into fresh offerings.
Outlook: Enjoy CD Rates Now, But Stay Nimble
CD investors presently find themselves in an opportune position, with yields at decade highs across various terms. However, history suggests this rising rate cycle will peak soon, giving way to falling yields within several months afterwards.
Savvy savers should enjoy stellar CD rates now, but keep maturities short and stay nimble. The strategy of laddering CDs provides an optimal way to generate yield while retaining flexibility.
As the Fed rate cycle rolls over in 2024, investors can gradually rotate out of maturing CDs into more attractive assets instead of getting stuck holding low legacy rates for years. By balancing strong current income potential against future optionality, CD investors can thrive across all rate environments.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
