Over the past two years, interest rates on certificates of deposits (CDs) have increased substantially—in lock-step with the Fed’s rate hikes. The national deposit rate for 5-year CDs is 1.38%, 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, now that inflation has declined—from more than 9% year-over-year in the summer of 2022 to slightly more than 3% now—the Fed is planning to put the brakes on rate hikes, with plans to reduce the rate three times this year.
So, should you open a CD now or wait? It could very well be the time to buy, especially since the Fed has indicated it will likely stop raising rates and start cutting them in 2024.
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, 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.
Rising rates tamp down on consumer demand and increase borrowing costs for companies. This can, in turn, cause unemployment to soar as companies may resort to layoffs in response to declining revenue.
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 over the past two years: 1-year CD rates have increased more than seven-fold, with 3-year and 5-year CDs up nearly four-fold and three-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 there will three rate cuts 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.
| How much interest would I earn on a 1-year CD? | ||
| Amount invested | APY | Interest earned (compounded monthly) |
| $1,000 | 5.00% | $51.16 |
| $1,000 | 5.25% | $53.78 |
| $1,000 | 5.50% | $56.41 |
| $5,000 | 5.00% | $255.81 |
| $5,000 | 5.25% | $268.91 |
| $5,000 | 5.50% | $282.04 |
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 weekly on Wednesdays.
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.
