How the Fed’s moves are impacting CD rates (2024)

Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed’s rate hikes. The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022. Yet many banks are offering rates well above that—some 5-year CDs have annual percentage yields (APYs) that exceed 4%, and some 1-year CDs are offering APYs well above 5%.

CD rates had been on the rise due to the Fed’s efforts to bring inflation down. However, as inflation has slowed—from more than 9% in the summer of 2022 to 3.5% now—the Fed is holding steady with interest rates between 5.25% to 5.5%, the same as it has been since July of 2023. However, there is a chance a cut could be coming later in the year.

Insights from Charlie Ripley, Senior Investment Strategist for Allianz Investment Management

“Ultimately, [the recent] policy decision was a well-rounded approach to give the Fed more time to gain confidence in the path of inflation, but we suspect they remain ready to cut knowing that the interest rate curve has remained inverted for the longest period on record.”

What happens when the Fed raises rates

Interest rates are the Fed’s number-one tool for fighting inflation. It raises rates to cool consumer spending, which decreases demand for good and services. Higher rates, on the other hand, reduce demand and inflation.

For example, rising rates send mortgage rates higher, too, making it more expensive to buy a home. Credit card APRs also tend to increase, making it more expensive to carry a balance month-to-month.

A look at CD rates since June 2022

Higher rates have big benefits for savers. Savings account and CD APYs tend to rise alongside the federal funds rate. If you’re in a position to save in today’s higher interest rate environment, investments like CDs could help accelerate your savings.

CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.

Why it's probably time to buy a CD

Rates will remain high for a bit longer, but it’s unclear how long. The Fed has indicated that a rate cut may still be coming in 2024, which means it’s unlikely that CD rates will continue to climb. Waiting to open a CD could mean missing out on some stellar rates.

Now, you can lock in high rates on both short-term and long-term CDs, and you can score some serious interest just by opting to deposit a larger lump sum into your CD.

What to consider before opening a CD

Before investing, shop around and compare the best CD rates offered at various banks and credit unions. It's possible you won't find the best rates at your current bank. Currently, short-term CDs—like 6-month and 1-year CDs—offer higher rates than their longer-term counterparts.

The tables below show examples of top rates by term length. The notes column provides some of the qualifications needed to get a CD but contact the institution to receive the most up-to-date information. Rates are updated daily but are subject to change.

Another strategy could be to buy a 1-year CD every month and build a CD ladder. With a CD ladder, you can lock in some high APYs and stretch those top-notch yields a bit longer while having more liquidity.

The takeaway

Since inflation and the Fed rate remain high, now may be the time to put some money away into CDs, especially longer-term accounts, since their fixed APY won’t change even if interest rates are cut later this year.