CD Rate Trends, Week of Sep 19: Mixed Rates

CD Rate Trends, Week of Sep 19: Mixed Rates

CD Term Last week’s peak national rate Highest national rate this week Change
3 months 2.15% annual return 2.15% annual return No change
6 months 4.00% APR 3.55% annual return Down 0.45%
1 year 3.21% annual return 3.50% APR Up to 0.29%
18 months 3.75% annual return 4.00% APR Up to 0.25%
2 years 3.59% annual return 3.60% PSA Up to 0.01%
3 years 3.55% annual return 3.55% annual return No change
4 years 3.85% annual return 3.85% annual return No change
5 years 3.75% annual return 3.65% annual return Down 0.10%

On July 27, the Federal Reserve raised the fed funds rate for the fourth time this calendar year. It was the second time in a row that the Fed has raised rates by an unusually large three-quarters of a percentage point, in addition to the previous two hikes this spring. As a result, CD rates have spiked dramatically since March and are likely to continue to rise over the next year.

CD rates since the end of 2021 have not only increased, but multiplied, with many of this week’s highest CD rates sitting at more than three times what the best certificates were paying just six months ago. Take 3 year old CD’s 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%.

Please note that the “peak rates” quoted here are the highest nationally available rates that Investopedia has identified in its research of daily rates at hundreds of banks and credit unions. This is very different from the national average, which includes all banks that offer a CD with that term, including many large banks that pay a pittance in interest. So the national averages are always pretty low, while the top rates you can find when shopping around are often 10 to 15 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 meetings throughout the year is the Fed’s announcement of whether to raise, lower or not change the fed funds rate.

The fed funds rate does not directly dictate what banks will pay customers for CD deposits. Instead, the fed 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 somewhat above zero, it provides an incentive for 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. of CDs.

At the start of the pandemic, the Fed announced an emergency rate cut to 0% as a way to help the economy avoid financial disaster. And for two full years, the fed funds rate stood at 0%.

But in March 2022, the Fed initiated a 0.25% rate hike, signaling that it would be the first of many. For the May 2022 meeting, the Fed already announced a second rise, this time of 0.50%. But both hikes were just a prelude to the larger 0.75 percentage point hike the Fed announced in mid-June, and then another 0.75 point hike on July 27.

Before the Fed makes any rate change, there is usually a reasonable understanding of what they will reveal before they announce it. As a result, many banks and credit unions start making early rate increases, while others choose to wait until the rate increase takes hold.

The next Fed meeting announcement will be made on September 21.

What is the expected trend for CD rates?

The Fed’s four rate hikes this year are just the beginning. Raising rates is one way to fight inflation, and with US inflation exceptionally high right now, the Fed publicly plans to implement a series of numerous rate hikes through 2022 and probably 2023.

While the Federal Reserve rate doesn’t affect long-term debt like mortgage rates, it does directly influence the direction of short-term consumer debt and deposit rates. So with several 2022 hikes yet to come, one would expect CD rates to rise considerably more 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 the higher rates that will be available in the not-too-distant future. Another option is to consider a special type of CD, sometimes called a “Rate Increase CD” or “Boost CD,” which allows you to trigger a rate increase on your existing CD if rates go up significantly.

Disclosure of fee collection methodology

Every business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers across the country, determining daily rankings of the highest-paying certificates in every 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.

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