| CD duration | Last week’s best national rate | Best national rate of the week | To change |
|---|---|---|---|
| 6 months | 3.01% APY | 3.01% APY | No change |
| 1 year | 2.70% APY | 3.00% APY | +0.30 |
| 2 years | 3.00% APY | 3.50% APY | +0.50 |
| 3 years | 3.25% APY | 3.55% APY | +0.30 |
| 5 years | 3.64% ABS | 3.65% ABS | +0.01 |
For the second time in six weeks, the Federal Reserve raised the federal funds rate by an unusually high three-quarters of a percentage point, on top of the previous two increases this spring. As a result, CD rates have risen significantly since March, and they are expected to continue to rise over the coming year.
CD prices since the end of 2021 have not just gone up, they have multiplied, with many of the best prices this week being more than three times what the best CDs were paying just six months ago. Take 3-year-old CDs, for example. The highest rate on a 3-year CD available nationally was 1.11% at the end of December. Today, the highest-paying 36-month certificate has a rate of 3.55%.
Note that the “highest rates” quoted here are the highest rates available nationwide that Investopedia has identified in its daily search of rates from hundreds of banks and credit unions. This is very different from the national average, which includes all banks offering a CD with this term, including many large banks that pay paltry interest. Thus, the national averages are always quite low, while the best rates you can find while shopping are often 10 to 12 times higher.
The Federal Reserve and CD rates
Every six to eight weeks, the Federal Reserve’s rate-setting committee holds a two-day meeting. A key outcome of the eight meetings throughout the year is whether the Fed announces whether to raise, lower, or hold the federal funds rate.
The federal funds rate does not directly dictate what banks will pay customers for CD deposits. Instead, the federal funds rate is simply the rate that banks pay each other when they borrow or lend their excess reserves overnight. However, when the fed funds rate is above zero, this induces banks to view consumers as a potentially cheaper source of deposits, which they then try to attract by raising savings, money market and interest rates. some CDS.
At the start of the pandemic, the Fed announced an emergency rate cut to 0% to help the economy avoid financial catastrophe. And for two full years, the fed funds rate stayed at 0%.
But in March 2022, the Fed launched a 0.25% rate hike and signaled it would be the first of many. As early as the May 2022 meeting, the Fed was already announcing a second hike, this time of 0.50%. But those two hikes were just a prelude to the larger 0.75 percentage point hike announced by the Fed in mid-June, and then another 0.75 point hike on July 27.
Before the Fed makes a rate change, there is usually a reasonable understanding of what it will unveil before actually announcing it. As a result, many banks and credit unions are beginning to make early rate increases, while others are choosing to wait until the rate hike is cemented.
The next Fed meeting announcement will be on September 21.
What is the expected trend for CD rates?
The Fed’s rate hikes in March and May were just the beginning. Raising rates is a way to fight inflation, and with US inflation unusually high right now, the Fed publicly plans to implement a series of many rate hikes through 2022 and likely into in 2023.
Specifically, the Fed is expected to initiate two more significant rate hikes, and then perhaps three more modest increases before the end of the year. This could push the federal funds rate from its current level of 0.75% to 2.5% or even higher.
Although the Fed rate does not impact long-term debt like mortgage rates, it does directly influence the direction of short-term consumer debt and deposit rates. So, with several hikes to come in 2022, one would expect CD rates to rise significantly as this year progresses.
That doesn’t mean you should avoid locking a CD now. But it does mean you should consider shorter-term certificates so you can capitalize on higher rates that will become available in the not-too-distant future. Another option is to consider a special type of CD, sometimes referred to as a “Rate Increase CD” or “Rate Increase CD”, which allows you to activate a rate increase on your existing CD if rates increase. considerably.
Disclosure of rate collection methodology
Each business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers nationwide and determines the daily ranking of the highest-paying certificates for each major term. To qualify for our listings, the institution must be federally insured (FDIC for banks, NCUA for credit unions) and the minimum initial CD deposit must not exceed $25,000.