| 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 | 3.00% APY | 3.05% APY | +0.05 |
| 2 years | 3.50% APY | 3.50% APY | No change |
| 3 years | 3.55% APY | 3.55% APY | No change |
| 5 years | 3.65% ABS | 3.75% APY | +0.10 |
For the fourth time this year, the Federal Reserve raised the federal funds rate on July 27. It was the second straight time the Fed raised rates by an unusually large amount of 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 rates since late 2021 haven’t just climbed, they’ve multiplied, with plenty this week best rates sitting at more than three times what top 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 rate searches of 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. One of the main outcomes of the eight rallies throughout the year is the Fed’s announcement on whether it is moving the federal funds rate up, down or unchanged.
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 federal funds rate is somewhat above zero, this induces banks to view consumers as a potentially cheaper source of deposits, which they then try to attract by increasing savings, the money market and CD prices.
At the start of the pandemic, the Fed announced a drop in emergency rates to 0% as a way to help the economy avoid financial disaster. 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 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 against inflationand with US inflation unusually high right now, the Fed is publicly planning to implement a series of many rate hikes through 2022 and probably into 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 2022 rides still to come, we could expect CD rates to rise considerably higher 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 called a “rate increase CD” or “increase CD”, which allows you to activate a rate increase on your existing CD if rates increase significantly.
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 CD’s minimum initial deposit must not exceed $25,000.
