Last week's announcement by the Federal Reserve that it has implemented only a minor rate hike, representing an easing off from its more dramatic 2022 increases, translated into only minor rate movements for certificates of deposit (CDs) this week. A third of the major CD terms climbed to slightly higher top rates, a third saw their top rate dip a bit, and the remaining terms marched in place.
|CD Term||Last Week's Top National Rate||This Week's Top National Rate||Change|
|3 months||4.10% APY||4.25% APY||+ 0.15%|
|6 months||5.00% APY||5.00% APY||No change|
|1 year||4.90% APY||5.00% APY||+ 0.10%|
|18 months||5.00% APY||5.00% APY||No change|
|2 years||4.86% APY||4.80% APY||- 0.06%|
|3 years||4.86% APY||4.84% APY||- 0.02%|
|4 years||4.75% APY||4.75% APY||No change|
|5 years||4.63% APY||4.70% APY||+ 0.07%|
|10 years||4.40% APY||4.30% APY||- 0.10%|
On Wednesday, the Federal Reserve announced its first rate decision for 2023. In contrast to the last six increases, which were all implemented at large increments of 0.50% and 0.75%, last week's Fed hike was for a more modest 0.25%, indicating a decision to begin easing off the aggressive inflation-fighting that characterized its 2022 monetary policy.
Still, the continued ratcheting up of the federal funds rate has catapulted deposit interest rates by orders of magnitude throughout the past year. In fact, many of this week's top CD yields are sitting four times higher—or more—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 4.84%.
The FDIC published its latest monthly national averages for major CD terms on January 17. The data show that over the prior month, national averages rose a notable 11-27 percent. But that also indicates a slowing pace of increases, as December's averages registered 20-40 percent higher than the previous month.
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 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 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 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 eight consecutive rate increases of 2022 and the beginning of 2023 are most likely not the end of this rate hike campaign. Raising rates is a way to fight inflation, and with U.S. inflation rates still running relatively high, the Fed expects to implement additional rate hikes in 2023.
Indeed, the market's current prediction is that we'll see another one or two quarter-point increases in the spring meetings. Many also expect we'll then see a stabilization period but then could witness one or two rate decreases before 2023 comes to a close.
As we've noted, however, each rate decision is made based on the economic data available at that time, meaning forecasts are only point-in-time estimates and can therefore change significantly as future data are released. So even the forecast for the next meeting's decision, announced in mid-March, cannot be counted on at this point, never mind any predictions for the coming summer or fall.
While the Fed's rate doesn't directly impact long-term debt like mortgages, it does directly influence 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 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 few months, as the federal funds rate may peak during the summer. Also, depending on the available time horizon you have for potential CD funds, it might be smart to lean towards 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.