How high will the CD prices be this year?

This year has already been a lucrative one for those with savings as interest rates on all types of deposit accounts have risen to record highs over the past 15 months. With dozens of savings, money market, and certificate of deposit (CD) accounts in our various rankings of the nation's best rates, it's now easy to earn over 5.00%.

This is all thanks to the Federal Reserve and its aggressive fight against post-pandemic inflation, which at times hit a 40-year high. Since March 2022, the Fed has rapidly increased the federal funds rate, and with it has increased the yields banks and credit unions are willing to pay you on your cash deposits.

But as rosy as things are, current Fed sentiment suggests rates still have room for a hike. How much higher can they go? Although there is never a crystal ball, here's what we do know.

The central theses

  • Interest rates on savings, money market and CD accounts are at their highest since at least 2007, spurred by the Federal Reserve's current rate hike campaign that began in March 2022.
  • Not yet hitting its target to fight inflation, the Fed has indicated that it is likely to hike rates further this year.
  • Any further rate hikes by the Fed will almost certainly push up CD rates.
  • The federal funds rate is unlikely to be cut in 2023.
  • Predictions about Fed interest rate movements should be made with caution as the Fed makes every decision based on the latest economic data and financial news.

Today's CDs are already achieving record prices

The trendline for Certificates of Deposit (CD) interest rates is directly influenced by the Federal Funds Rate. When the Fed raises interest rates, most banks and credit unions raise their deposit rates in turn (though not necessarily by the same amount). The opposite is true when the central bank cuts interest rates.

Today we are in a historic period of rising interest rates that began in March 2022 when the Fed began raising interest rates in earnest. Triggered by pandemic-triggered inflation, the Fed rapidly hiked rates by a total of 5.00% over the next 14 months, the fastest pace in 40 years.

As a result, CD prices have skyrocketed. At the start of 2022, before the Fed's first rate hike, the leading interest rates for CD maturities from 6 months to 5 years ranged from just 0.80% to 1.50% APY. In contrast, today's front runners pay in our daily ranking of the best nationwide CDs three to six times morewith peak interest rates between 4.77% and 5.65% APR.

It is estimated that interest rates on certificates of deposit have not been this high since at least 2007, when the Federal Funds Rate was last at what it is today. From June 2006 to September 2007, the Fed's interest rate was a quarter point higher than today's interest rate. But since then, the highest peak has been less than half of today's interest rate, while the federal funds rate has been virtually zero for nine of the last 16 years.

Will CD prices go higher this year?

Nobody knows the answer to this question for sure, but for now the signs are pointing to yes. That's because recent inflation readings were still double the Fed's target inflation rate of 2.00%, which is why the Fed says it has more work to do to slow the economy and reduce inflationary pressures.

When the Fed's rate-setting committee met last week, it opted to leave rates there for the time being rather than push through an 11th rate hike in as many meetings. But in his post-meeting comments, as well as in his testimony before Congress this week, Fed Chair Jerome Powell made it clear that one or more rate hikes are on the cards in 2023.

More specifically, the Fed's post-meeting report shows that 12 of the 18 members on the committee are currently in favor of at least two rate hikes before the end of the year.

Should one or more of these rate hikes materialize, it would likely increase the federal funds rate by 0.25% to 0.50%, which would equal or exceed the Fed's maximum rate of 2006-2007. This in turn would almost certainly drive up CD prices as well.

Of course, another rate hike by the Fed is not guaranteed, as the Fed makes every rate decision based on the latest economic data and financial news. A surprise in inflation or employment data or a major development in the banking sector could definitely influence the Fed's decision.

note

For cash you don't want to tie up on a CD, high-yield savings and money market accounts also currently offer excellent returns. Several options in our daily rankings of Best Savings Accounts and Best Money Market Accounts pay 5.00% or more. Note, however, that the interest rates on these accounts are floating, which means they can go down at any time, unlike the blocked interest rate on a CD account.

Could CD prices fall this year?

While it's often the case that what goes up must eventually go down, the Federal Reserve is currently unlikely to cut interest rates this calendar year. In fact, Atlanta Fed President Raphael Bostic said in mid-May that he doesn't expect rates to fall this year.

The Fed's “dot plot” from its June 14th meeting confirms this. The chart shows where each Fed Committee member believes the Fed Funds rate should be in the current year and for years to come, and of the 18 Fed members, none indicated that the Fed Funds rate would be lower in 2023 would be than today's interest rate. In fact, the most conservative forecast presented in the scatter chart was just two members who assumed the policy rate would remain at its current level for the rest of the year.

Again, it is important to note that Fed moves cannot be reliably predicted as the state of the economy can change between meetings. But at this point, the most likely thing that seems most likely is that we will likely hold interest rate levels that we reach this year until sometime in 2024.

The conclusion for CD buyers

With interest rates already at record highs, it's hard to go wrong by opening a top-paying CD now. Interest rates could certainly rise a little in the coming months. Compared to the CD rates that have already risen, the rise is likely to be small.

Furthermore, we don't know for sure if the Fed's rate hikes will actually materialize. Instead, if Fed Funds rates stay where they are, that means CD rates have likely already reached their final peak.

Still, there's no denying that the odds are good that we'll see more rate hikes at the Fed's July or September meetings, or maybe both. So it's entirely possible that holding back a CD will pay off now and have a higher return later this year.

Disclosure of Tariff Collection Methodology

Each business day, Investopedia tracks rate data from more than 200 banks and credit unions offering CDs to customers across the country, and provides daily rankings of the best paying certificates for each key time period. To qualify for our listings, the institution must be federally insured (FDIC for banks, NCUA for credit unions) and the minimum CD deposit must not exceed $25,000.

Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association in order to become a member if you don't meet other eligibility criteria (like not living in a specific area or working in a specific type of job). ), We exclude credit unions whose donation needs are $40 or more. For more information on how we select the best fares, see our full methodology.

Leave a Reply

Your email address will not be published. Required fields are marked *