This year has already been a lucrative one for those with savings in the bank, as interest rates on all types of deposit accounts have surged to record highs over the past 15 months. It’s now easy to earn more than 5.00% with dozens of savings, money market, and certificate of deposit (CD) accounts in our various rankings of the best nationwide rates.
That’s all thanks to the Federal Reserve, and the aggressive fight it has been waging against post-pandemic inflation that, at one point, had reached a 40-year high. Since March 2022, the Fed has been rapidly hiking the federal funds rate, and as it’s done so, the returns that banks and credit unions are willing to pay you for your cash deposits have gone up too.
But as rosy as things already are, current Fed sentiment suggests interest rates still have room to run. How much higher can they go? While there’s never a crystal ball, here’s what we know.
- Rates on savings, money market, and CD accounts are at their highest levels since at least 2007, pushed there by the Federal Reserve’s current rate-hike campaign that began in March 2022.
- Since the Fed has not yet achieved its inflation-fighting goal, it has indicated it’s likely to further raise its benchmark rate this year.
- Any additional rate hike by the Fed will almost certainly nudge CD rates higher.
- It looks unlikely that the federal funds rate will be reduced in 2023.
- Predictions on Fed rate movements should be taken with a grain of salt, as the Fed makes each decision based on the latest economic data and financial news.
Today’s CDs Are Already Paying Record Rates
The trend line for certificate of deposit (CD) rates is directly influenced by the federal funds rate. When the Fed raises its benchmark rate, most banks and credit unions raise their deposit rates in turn (though not necessarily by the same amount). The reverse is true when the central bank decreases the fed funds rate.
Today we are in a historic period of rising rates, launched in March 2022 when the Fed began increasing the fed funds rate in earnest. Triggered by pandemic-fueled inflation, the Fed rapidly raised rates over the following 14 months by a cumulative 5.00%, its fastest pace of increases in 40 years.
As a result, CD rates have skyrocketed. At the start of 2022, before the Fed’s first hike, the leading rates for CD terms of 6 months to 5 years ranged from just 0.80% to 1.50% APY. In contrast, today’s leaders in our daily ranking of the best nationwide CDs are paying three to six times more, with top rates ranging from 4.77% to 5.65% APY.
It’s estimated that certificate of deposit rates have not hit levels this high since at least 2007, as that’s the last time the federal funds rate was as high as it is today. From June 2006 to September 2007, the Fed’s benchmark rate sat a quarter-point higher than today’s rate. But since then, the highest peak was less than half of today’s rate, while in nine of the last 16 years, the fed funds rate was effectively zero.
Will CD Rates Climb Higher This Year?
No one knows the answer to this question for sure, but at the moment, signs are pointing to yes. That’s because the latest inflation reading was still double the Fed’s target inflation rate of 2.00%, and as a result, the Fed says it has more work to do to slow the economy and reduce inflationary pressure.
When the Fed’s rate-setting committee met last week, it opted to hold rates where they are for now, rather than implement an 11th rate increase in as many meetings. But in his post-meeting comments, as well as in testimony to Congress this week, Fed Chairman Jerome Powell made it clear that one or more rate hikes are still in the cards for 2023.
More specifically, the Fed’s post-meeting report indicates that 12 of the committee’s 18 members currently favor at least two rate increases before the year ends.
If one or more of these rate increases comes to pass, it would likely raise the federal funds rate by 0.25% to 0.50%, which would match or exceed the Fed’s 2006-2007 peak rate. In turn, it would almost certainly push CD rates higher as well.
Of course, any additional Fed rate increase is not guaranteed, as the Fed makes each rate decision based on the latest economic data and financial news. A surprise in inflation or employment data, or a major development in the banking sector, could definitely sway the Fed’s decision.
For cash you’re not willing to commit to a CD, high-yield savings and money market accounts also offer excellent returns right now, with several options in our daily rankings of the best savings accounts and best money market accounts paying 5.00% or better. Just be aware that these accounts’ rates are variable, meaning they can go down at any time, unlike the locked nature of a CD rate.
Could CD Rates Go Down This Year?
Though it’s often true that what goes up must eventually come down, it’s looking unlikely at this time that the Federal Reserve will reduce rates this calendar year. In fact, Atlanta Fed president Raphael Bostic said in mid-May that he doesn’t see rates declining this year.
The Fed’s “dot plot” from its June 14 meeting corroborates this. The graph shows where each member of the Fed committee believes the fed funds rate should be over the current and coming years, and of the 18 Fed members, not one indicated a 2023 fed funds rate lower than today’s rate. In fact, the most conservative projection represented in the dot plot was just two members who saw the fed funds rate holding at its current level for the rest of the year.
Once again, it’s important to note that Fed moves cannot reliably be predicted, as things can shift in the economy between meetings. But at this moment, it seems most likely that whatever rate level we reach this year, we’re likely to hold onto until sometime in 2024.
The Bottom Line for CD Shoppers
With rates already at record highs, it’s hard to go wrong with opening a top-paying CD right now. Sure, rates could inch up a bit over the coming months. But the increase is likely to be minor relative to how high CD rates have already climbed to-date.
In addition, we don’t know for sure that any Fed increases will actually come to fruition. If instead the fed funds rate plateaus where it is now, that means CD rates are likely at their ultimate peak already.
Still, there’s no denying that, right now, the odds are favorable that we’ll see further rate improvements at the Fed’s July or September meetings, or perhaps even both. So it’s certainly possible that holding off on a CD right now could pay dividends by scoring a higher yield later this year.
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.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.