CD Rate Trends, Week of July 18: Rates rising

Certificate of deposit (CD) rates have been fairly stable for the past two weeks following a late-June jump brought on by the Fed's big rate hike, but they are beginning to increase once more this week. While other terms are keeping stable, the top national rate on some of the shorter CD terms has increased.

In addition to two previous increases this spring, the Federal Reserve increased the federal funds rate by unusually large three-quarters of a percentage point on June 15. As a result, from March to May and again two weeks ago, CD rates shot sky. Even though they have generally leveled down over the past two weeks, certificate rates are anticipated to continue climbing during the upcoming year.

CD Term  Last Week's Top National Rate This Week's Top National Rate  Change
6 months  2.32% APY 3.01% APY +0.69
1 year  2.50% APY  2.55% APY  +0.05
2 years  3.00% APY 3.00% APY No change
3 years  3.25% APY 3.25% APY  No change
5 years  3.64% APY  3.64% APY  No change

Since the end of 2021, CD rates have not only risen but also multiplied, with the highest rates this week paying double or even triple what the best CDs were earning six months ago. Choose CDs with a 3-year term. In late December, 1.11 % was the highest rate for a 3-year CD that was readily available worldwide. The highest-paying 36-month certificate now offers a rate of 3.25 percent.

The Federal Reserve and CD Rates

The Federal Reserve's rate-setting assembly met for two days every six to eight weeks. The Fed's announcement of whether it is increasing, lowering, or holding the federal funds rate steady is one of the eight meetings held year-round.

The amount that banks will pay clients for CD deposits is not directly influenced by the federal funds rate. The federal funds rate is simply the price that banks charge one another when they lend or borrow bank funds from one another overnight. However, when the fed funds rate is above zero, banks are encouraged to look to consumers as a potential source of cheaper deposits, which they then aim to attract by raising savings, money market, and other deposit rates.

The Fed announced an urgent rate drop to 0 percent at the start of the virus to help the economy avoid a banking crisis. And the fed funds rate stayed at 0 percent for the full two years.

However, the Fed started a 0.25 percent rate increase in March 2022 and said it would be the first of many. The Fed had already announced a second increase by the May 2022 meeting, this time by 0.50 percent. However, each of those increases was only a spur to the greater 0.75 percentage point increase the Fed announced in mid-June.

Before the Fed publishes a rate move, there is typically a reasonable notion of what will be disclosed.

What Is the Predicted Trend for CD Rates?

The Fed began raising rates in March and May, but that was only the beginning. Raising rates is one method for controlling prices, and with U.S. inflation currently running extremely high, the Fed has made public plans to implement a number of rate hikes through 2022 and probably into 2023.

More specifically, it's expected that the Fed would begin two additional major rate hikes before the end of the year, followed by three possible smaller increases. The federal funds rate could rise from its present level of 0.75 percent to 2.50 percent or possibly higher as a result.

While the Fed rate has little effect on long-term debt, such as mortgage rates, it has a direct impact on deposit rates and short-term consumer debt.

That doesn't mean that you shouldn't lock a CD in right away. However, it does suggest that you think about certificates with shorter terms so that you can benefit from higher rates that become available in the not-too-distant future. Another choice is to think about a particular CD type, sometimes known as a "raise your rate CD" or "step-up CD," which allows you to activate one rate increase on your current CD in the event that rates increase sharply.

Rate Collection Methodology Disclosure

Investopedia tracks the rate information of more than 200 banks or credit unions that provide CDs to customers nationwide every business day and publishes a daily rating of the best-paying certificates for each key phrase. The organization must be guaranteed by the government (FDIC for banks, NCUA for credit unions), and the CD's minimum initial deposit cannot be less than $25,000 in order to be included on our lists. 

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