|CD Term||Highest national rate last week||The highest national rate this week||Change|
|3 months||4.05% API||4.05% API||No change|
|6 months||5.00% API||4.60% API||– 0.40%|
|1 year||5.00% API||5.00% API||No change|
|18 months||5.02% API||5.02% API||No change|
|2 years||5.00% API||4.86% API||– 0.14%|
|3 years||4.86% API||4.86% API||No change|
|4 years||4.60% API||4.75% API||+ 0.15%|
|5 years||4.65% API||4.63% API||– 0.02%|
|10 years||4.40% API||4.40% API||No change|
The Fed’s mid-December increase in the federal funds rate was its seventh increase this year. After four consecutive big hikes of 0.75%, the central bank’s latest hike was just under 0.50%. While still considered a big hike for the Fed, the slight easing of the hike is due to indications that inflation is easing slightly.
The continued increase in the federal funds rate has caused interest rates on deposits to increase by orders of magnitude. In fact, many of this week’s top CDs are four times—or more—what the top certificates were paying at the start of 2021. Take three-year CDs, for example. The highest rate last December on a nationally available three-year CD was 1.11%. Today, the highest paying 36-month certificate boasts a rate of 4.86%.
The FDIC released its monthly national averages for prime CD maturities on December 19. The data shows that over the previous month, national averages rose significantly in each term, in some cases by 20-40 percent.
Note that the “highest rates” listed here are the highest nationally available rates identified by Investopedia in its daily rate research of hundreds of banks and credit unions. This is much different than the national average, which includes all banks that offer CDs with that term, including many large banks that pay a pittance. Therefore, national averages are always quite low, while the highest rates you can discover by shopping around are often 10 to 15 times higher.
Federal Reserve and CD Rates
Every six to eight weeks, the Federal Reserve’s interest rate-setting committee holds a two-day meeting. One of the primary outcomes of the year’s eight meetings is the Fed’s announcement of whether they are 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 to each other overnight. However, when the federal funds rate is slightly above zero, it gives banks an incentive to view consumers as a potentially cheaper source of deposits, which they then try to attract by raising savings, money market and CD rates.
At the start of the pandemic, the Fed announced an emergency rate cut to 0% as a way to help the economy stave off financial disaster. And for two full years, the federal funds rate remained at that zero level.
But in March 2022, the Fed initiated a 0.25% rate hike and indicated it would be the first of many. By the May 2022 meeting, the Fed has already announced a second hike, this time to 0.50%. But both hikes were just the prelude to four larger increases of 0.75 percentage points that the Fed announced in mid-June, late July, mid-September 21 and November 2.
With the latest economic data showing that inflation, while still high, has eased a bit, the Fed backed off the pace of its hike a bit, announcing a 0.50% hike at its December 14 meeting. The Fed also expects additional hikes to continue in 2023, although decisions are made one-by-one at each meeting based on the latest economic indicators. The Fed’s next rate announcement will be made on February 1st.
What is the predicted trend for CD rates?
The Fed’s five rate hikes this year are still just the beginning. Raising rates is a way to fight inflation, and with US inflation still extremely hot, the Fed is publicly planning to implement additional rate hikes through 2022 and possibly 2023.
While the Fed rate does not affect long-term debt like mortgage rates, it directly affects the direction of short-term consumer debt and deposit rates. So with more increases likely to come, one could reasonably expect CD rates to rise further this year and next.
That doesn’t mean you should avoid locking CDs now. But it’s worth considering short-term certificates so you can take advantage of the higher rates that become available in the not-too-distant future. Or consider “rate increase” or “step up” CDs, which allow you to activate a single rate increase on an existing CD if the rates are significantly higher.
Publication of rate collection methodology
Each business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers across the country and determines daily rankings of the highest-paying certificates in each major period. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the minimum initial CD deposit must not exceed $25,000.