Certificate of deposit (CD) rates have climbed to levels not seen in over a decade, prompting many savers to lock in rates for their cash. As the Federal Reserve continues raising interest rates to fight inflation, banks have followed suit by boosting the yields they pay on savings products like CDs.
CD Rates Reach 14-Year Peak
The average 1-year CD rate recently hit 5.56%, the highest level since July 2009 according to Bankrate data. Rates on 5-year CDs also hit a 14-year high at 5.61%. These attractive yields give savers a way to outpace inflation, which remains high at 6.4% as of December 2023.
As the table below shows, top-yielding CDs from online banks now offer over 6% interest for 1-, 3-, and 5-year terms. Even big national banks are advertising CD specials with rates over 5%.
| Bank | 1-Year CD | 3-Year CD | 5-Year CD |
|---|---|---|---|
| CIT Bank | 6.10% | 6.20% | 6.25% |
| Marcus by Goldman Sachs | 6.15% | 6.20% | 6.15% |
| Ally Bank | 5.75% | 5.85% | 5.90% |
| Wells Fargo | 5.25% | 5.35% | 5.50% |
Savers are eager to lock in these high yields according to experts. Dan Geller, founder of online marketplace Objectiva, told CNBC that “consumers are rushing to open CDs as fast as banks can take their money.”
Fed Rate Hikes Driving CD Surge
At the start of 2023, the average 1-year CD rate was just 2.73%. But the Federal Reserve raised its benchmark federal funds rate seven times over the past year, bringing it up to a range of 4.25% to 4.50% currently. Banks use treasuries and other factors to set their own rates, but generally follow the Fed’s moves.
Additional Fed hikes are likely this year as well. According to CME Group’s FedWatch tool, markets expect the federal funds rate to rise to around 5% by mid-2024. This indicates CD rates still have room to climb further.
“CD rates will likely peak during the next six months, in tandem with Fed rate increases coming to an end,” explained Ken Tumin, founder of DepositAccounts.com. “I expect 1-year CD yields will surpass 6% at online banks while 5-year CDs could potentially reach 6.5%.”
CD Investors Prioritizing High Yields
While savings accounts tend to track CD yields closely, locking in a multi-year CD guarantees you the advertised rate no matter what happens with future rate hikes or cuts. This protection against declining rates in the future makes CDs very appealing to yield-focused savers right now.
In a Bankrate survey last December, 40% of CD investors said rate was their top priority when opening a new CD, compared to just 16% who valued flexibility over yield. Additionally, complexes,” says Greg McBride, chief financial analyst at Bankrate.
This demand for yield has also sparked some very long-term CD offers guaranteeing today’s high rates for up to 10 years or longer. These “brokered CDs” are sold by brokers rather than directly by banks, but they can give savers peace of mind knowing they’ll earn well above-average returns no matter what happens with rates or inflation down the road.
What Comes Next?
Economists expect inflation to gradually decline over 2024, falling close to the Fed’s 2% target by year-end. Lower inflation combined with slowing economic growth could convince the central bank to cut interest rates at that point. Rate cuts would likely pull down CD yields as well.
Ken Tumin believes “the best course for CD investors is to build a CD ladder using terms between 1 and 5 years. This strategy locks in today’s high yields while providing flexibility to reinvest at higher rates if they become available.”
Dan Eye, head of CD research at Objectiva, notes that even if rates fall in 2025 or 2026, they likely won’t drop back down to their record lows from 2020 and 2021. “Savers who lock in 4%, 5% or even 6% yields now are getting rates that compare very favorably to historical averages,” he points out. “So while returns may moderate some, CDs should still provide good income potential for cash investors in the coming years.”
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