With the Federal Reserve's next rate announcement just over a week away, a few banks have made anticipatory moves in their top certificate of deposit (CD) rates. The best nationwide rate rose notably for three of the most popular CD terms—1 year, 3 years, and 5 years—while the leading rates in all other terms held their ground.
|CD Term?||Last Week's Top National Rate||This Week's Top National Rate?||Change
|3 months||4.85% APY||4.85% APY||No change|
|6 months||5.00% APY||5.00% APY||No change|
|1 year||5.05% APY?||5.25% APY?||+ 0.20|
|18 months||5.25% APY||5.25% APY||No change|
|2 years||5.50% APY||5.50% APY||No change|
|3 years||4.85% APY||5.50% APY?||+ 0.65|
|4 years||5.00% APY||5.00% APY||No change|
|5 years||4.70% APY?||5.00% APY?||+ 0.30|
|10 years||4.30% APY||4.30% APY||No change|
On February 1, the Federal Reserve announced its first rate decision for 2023. Unlike the most recent six increases in 2022, which were all implemented in large increments of 0.50% and 0.75%, February's Fed hike was for a more modest 0.25%, signaling a decision to begin easing off the aggressive inflation fighting that has characterized the central bank's monetary policy for the past year.
Still, the continued ratcheting up of the federal funds rate since last March has catapulted deposit interest rates by orders of magnitude. In fact, many of this week's top CD yields are sitting four to five times higher than what the best certificates were paying at the start of last year. Take 3-year CDs, for example. In December 2021, the highest rate on a nationally available 3-year CD was 1.11%. Today, the top-paying 36-month certificate boasts a rate of 5.50%.
The FDIC published its latest monthly report of national CD averages on February 21. The newest data show that compared to January, national averages across the major terms continued to rise. But the growth has slowed considerably. Compared to monthly average rate increases of up to 40 percent in December and then up to 27 percent in January, the biggest jump from January to February was just 10 percent, seen among 6-month CDs.
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 it is increasing or decreasing the federal funds rate, or leaving it 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 funds, 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 two full 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 four larger 0.75 percentage point hikes the Fed announced in mid-June, late July, mid-September 21, and November 2. It then ended the calendar year's meetings with a 0.50% increase on December 14.
With the latest economic data indicating that inflation has eased a bit, the Fed continued backing off the pace of its increases with its February 1 hike coming in at just 0.25%. Though decisions are made one at a time at each meeting based on the latest economic indicators, the Fed has projected that additional increases are likely in 2023. The next Fed rate announcement will be made March 22.
What Is the Predicted Trend for CD Rates?
The Fed's current string of eight consecutive rate increases is most likely not the end of this rate hike campaign. Rate hikes are a way to fight inflation, and with U.S. inflation rates still running relatively high, the Fed has indicated that it expects to implement additional rate hikes in 2023.
Indeed, the stronger-than-expected jobs report released March 3 indicated that inflation may not be as transitory as hoped, and markets began forecasting the Fed would raise rates two or three more times this winter and spring, including a possible 0.50% rate hike this month.
But the forecasts have now changed in light of the high-profile bank failures in the news and the tremors they have sent through the financial markets. Forecasters now predict just a 0.25 point increase from the Fed next week, as well as perhaps only one more hike after that before stabilizing and starting to decrease.
As this week's news cycle shows, rate moves are hard to predict much into the future, with each decision based on the economic data available at that moment in time. So even forecasts for the meeting next week are simply best guesses based on what we know now.
While the Fed's rate doesn't directly impact long-term debt like mortgages, it does have a direct influence on short-term consumer debt and deposit rates. So, with more rate increases likely, one could reasonably predict that CD rates will rise a bit further in 2023. But the increases could be modest, and at some point rates could start moving in the other direction.
In light of this, it's making increasing sense to consider locking in the best CD rates you can find in the coming months, as the federal funds rate may peak in the coming weeks or months. Also, depending on the available time horizon you have for potential CD funds, it might be smart to lean toward longer-term CDs as rates near their high point, enabling you to secure the best rate you can for as long into the future as possible.
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.
Federal Reserve. "Open Market Operations."
FDIC. National Rates and Rate Caps.
CME Group. CME FedWatch Tool.