Will CD rates continue to go up in 2023?

CD interest rates today

The average annual percentage yield (APY) on one-year CDs was 1.79% as of October 16, 2023, and the average return on a five-year CD was 1.38%, according to the Federal Deposit Insurance Corporation (FDIC).

This is a big jump from October 2022, when the average APY for a one-year CD was only 0.71% and for a five-year CD was 0.83%. Most of the increase over the past year happened in the first six months. By April 2023, the average APY for one-year and five-year CDs increased to 1.54% and 1.37% respectively.

Of course, these are just averages. CD rates vary between banks and the best CD rates are above the average. You just need to know how to find them.

With the pace of rate increases slowing, what will happen to CD rates in the next few months?

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Why did CD rates move higher in 2023?

CD rates are correlated with the fed funds rate. If this rate rises, so will the rates on CDs, although sometimes with a lag. Typically, longer-term CDs pay higher rates than shorter-term CDs, but this is not the case right now because the yield curve is inverted, which means longer-term rates are lower than short-term rates.

Rates vary between institutions because some institutions choose to compete for savers by paying higher rates. Online banks frequently offer higher rates for this reason. Credit unions will often pay higher rates because they are non-profits. Rather than paying shareholders, they return their profits to members and one of the ways they may do this is through higher savings rates. At many institutions, the rate is also higher as you invest more.

The fed funds rate is the rate banks charge other banks when they lend them money overnight. The target range for this rate is set by the Federal Open Market Committee (FOMC) at the Federal Reserve, which is the central bank of the U.S. The committee meets eight times yearly to set the target rate based on economic conditions. For instance, they may raise the target rate to slow down the economy if the inflation rate is too high or lower it to stimulate the economy if unemployment is too high.

Other interest rates, such as those on U.S. Treasurys, mortgages, loans and savings tend to move in the same direction as the fed funds rate and the best CD rates tend to average near the top of the fed funds target range. In 2020, U.S. inflation began to rise dramatically until it peaked at 9.1% year-over-year in June 2022. To combat this inflation, The Fed raised the target fed funds rate seven times in 2022 and four times in 2023, and now the target range is 5.25% to 5.50%.

These rate hikes appear to be working. The U.S. inflation rate has now fallen to 3.7%, and at their last meeting on September 20, the FOMC kept rates steady after 11 rate hikes. Does the pause at the last meeting mean rate hikes are over? Possibly. The most significant move is almost certainly behind us, but the timing and direction of the next move are uncertain.

CD rates are likely at or near their peak

At the last FOMC meeting, 12 committee members predicted one more rate hike of 0.25% in 2023, while seven predicted rates would remain unchanged.

According to the CME FedWatch Tool, there’s about a 97% chance that rates will stay the same at the October 31 to November 1 FOMC meeting based on trading activity in fed fund futures. At the December 12 -13 meeting there’s about a 70% chance the FOMC will keep rates the same and a 29% chance of a 0.25% rate hike.

Similarly, seventy-seven percent of 111 economists recently surveyed by Reuters think the Fed will keep rates steady for the rest of 2023, while 21% believe there will be one more rate hike and 2% anticipate two rate hikes.

FOMC members, market participants and economists see little chance of additional rate hikes in 2024 and believe rates will be cut sometime next year.

Since CD rates move with the fed funds rate, there is a chance they will rise slightly in 2023, but then they will remain steady or fall in 2024.

Of course, no one can see the future. If you believe rates might fall soon, you might want to consider investing in longer-term CDs to lock in higher rates. If you think CDs may go up further, and you’re worried about being locked into a low-rate CD while rates continue to rise, you should consider CDs with shorter terms to take advantage of higher APYs when they become available.

Another strategy is to build a CD ladder with short-term CDs to maintain flexibility in the rising rate environment. This means dividing your investment across multiple CDs with different maturities. With this method, you’ll have CDs maturing every year and then get regular opportunities to invest in CDs with better rates.

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CDs are solid investments

CDs are a more lucrative and nearly risk-free alternative to standard or high-yield savings accounts. If you’re with a bank insured by FDIC or a credit union insured by the National Credit Union Administration, your money is guaranteed up to $250,000.

If you have concerns about deciding how much to invest, you can shop around. Banks offer CDs with various terms, so you don’t have to commit to any specific timeline or sum of money.

In addition to traditional, fixed-rate CD products, there are also other types of CDs you can invest in.

Liquid CDs allow you to make withdrawals more easily and without financial penalty.

Variable CDs have interest rates that rise or fall according to some benchmark, like the Consumer Price Index, the prime rate or the performance of the S&P 500.

Bump-up CDs allow you to take advantage of rising rates by allowing a limited number of boosts to your interest during the term.

The only risk you’ll encounter is not abiding by the CD rules. For instance, if you need to withdraw your funds before the fixed term ends, you’ll likely have to pay a penalty equal to a chunk of the interest you’ve earned.

Banks offering the best CD rates

Some banks offer competitive CD rates well beyond the national average, so comparing offers is essential. Here are some of the best CD rates monitored by Moneywise:

Crescent Bank has a range of CD offerings with an exceptionally high APY. The shortest CD is one year, with an APY of 5.35%. The options increase by six-month increments up to three years and then go up by 12-month increments to five years. The highest APY of 5.35% is offered for 12-month and 24-month CDs. The minimum deposit is $1,000, but you won’t have to worry about maintenance fees.

Quontic Bank offers CDs with terms from six months to five years. The minimum deposit is relatively low for an online bank at $500. If you don’t want to lock your money away for long, the six-month CD still has a strong return of 5.05% APY and the one-year CD jumps to 5.30%.

CIT Bank is great for those seeking a more flexible option. They offer an 11-month no-penalty CD with an APY of 4.90%. The minimum deposit is $1,000, but you can withdraw the total balance and interest earned without penalty after seven days.

Finally, if you don’t want to lock away a chunk of money, The State Exchange Bank offers low-commitment, high-yield options with a $1 minimum deposit. The terms are four months and seven months with a 3.00% APY or nine months with a 3.50% APY.

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