Rates on certificates of deposit (CDs) are notably up to start October, which is no surprise following the Fed’s September 21 announcement of another massive rate hike. In six of the eight major CD terms, the top nationally available rate climbed at least 20 basis points, and as much as two-thirds of a percentage point in the longest term. Also notable is that every term from 18 months to 5 years now has a top national rate at or above 4%.
The Federal Reserve’s September hike of the federal funds rate was its fifth increase this year, and the third consecutive 0.75% increase, which is a historically large increment for the Fed. As a result, CD rates have bolted dramatically higher since March, and are likely to rise further into 2023.
CD rates since the end of last year haven’t just climbed, they’ve multiplied, with many of this week’s top CD rates sitting three or almost four times higher than what the best certificates were paying at the start of 2021. Take 3-year CDs, for example. The highest rate on a nationally available 3-year CD was 1.11% in late December. Today, the top-paying 36-month certificate boasts a rate of 4.22%.
Note that the “top rates” quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by 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 primary outcomes of the eight gatherings throughout the year is the Fed’s announcement on 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 banks pay each other when they borrow or lend their excess reserves to each other overnight. However, when the federal funds rate is something higher than zero, it provides an incentive for banks to look to 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 a financial disaster. And for a full two years, the federal funds rate remained at that zero level.
But in March 2022, the Fed initiated a 0.25% rate increase and indicated it would be the first of many. By the May 2022 meeting, the Fed was already announcing a second increase, of 0.50% this time. But both of those of hikes were just a prelude to three larger 0.75 percentage point hikes the Fed announced in mid-June, late July, and most recently September 21.
The Fed’s next regularly scheduled rate announcement will be made on November 2.
What Is the Predicted Trend for CD Rates?
The Fed’s four rate increases this year are still just the beginning. Raising rates is a way to fight inflation, and with U.S. inflation running exceptionally hot right now, the Fed is publicly planning to implement a series of numerous rate hikes through 2022 and likely into 2023.
While the Fed rate doesn’t 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 hikes still to come, one would expect CD rates to rise considerably higher as this year progresses.
That doesn’t mean you should avoid locking in a CD now. But it does mean you should consider shorter-term certificates so that you’ll be able to capitalize on higher rates that become available in the not-too-distant future. Another option is to consider a special CD type, sometimes called a “raise your rate CD” or “step-up CD,” which allows you to activate one rate increase on your existing CD if rates go considerably higher.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, 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.