CD Rate Trends, Week of June 27, 2022: Rate Jump

CD Term Last week’s peak national rate Highest national rate this week Change
6 months 1.60% annual return 2.32% annual return +0.72
1 year 2.25% annual return 2.50% APR +0.25
2 years 2.87% annual return 3.00% APR +0.13
3 years 3.05% APR 3.25% annual return +0.20
5 years 3.20% APR 3.50% APR +0.30

The Federal Reserve raised the fed funds rate an unusually large three-quarters of a percentage point two Wednesdays ago, in addition to two earlier hikes this spring. CD rates had already risen dramatically from March to May, but certificate rates are expected to continue to rise and they certainly did this week.

CD rates since the end of 2021 have not only gone up, but multiplied, with this week’s price best rates double or even triple what the best CDs were paying six months ago. Take 3 year old CD’s for example. The highest rate on a 3-year CD available nationally was 1.11% at the end of December. Today, the highest paying 36-month certificate carries a rate of 3.25%.

Please note that the “peak rates” quoted here are the highest nationally available rates that Investopedia has identified in its research of daily rates at hundreds of banks and credit unions. This is very different from the national average, which includes all banks that offer a CD with that term, including many large banks that pay a pittance in interest. So the national averages are always pretty low, while the highest rates you can find when shopping around are often 10 to 12 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 main outcomes of the eight meetings throughout the year is the Fed’s announcement as to whether they are moving the fed funds rate up, down or unchanged.

The fed funds rate does not directly dictate what banks will pay customers for CD deposits. Instead, the fed funds rate is simply the rate that banks pay each other when they borrow or lend their excess reserves overnight. However, when the fed funds rate is somewhat above zero, it provides an incentive for banks to view consumers as a potentially cheaper source of deposits, which they then try to attract by raising savings, money market, and interest rates. of CDs.

At the start of the pandemic, the Fed announced a emergency rate cut to zero percent, as a way to help the economy avoid financial disaster. And for two full years, the fed funds rate stood at zero percent.

But in March 2022, the Fed initiated a 0.25% rate hike, signaling that it would be the first of many. For the May 2022 meeting, the Fed already announced a second rise, this time of 0.50%. But both hikes were just a prelude to the larger 0.75 percentage point hike the Fed announced on June 15.

Before the Fed makes any rate change, there is usually a reasonable understanding of what they will reveal before they announce it. As a result, many banks and credit unions start making early rate increases, while others choose to wait until the rate increase takes hold.

The next Fed meeting announcement will be made on July 27.

What is the expected trend for CD rates?

The Fed’s rate hikes in March and May were just the beginning. Raising rates is a form of fslight inflationand with US inflation exceptionally high at the moment, the Fed publicly plans to implement a series of numerous rate hikes through 2022, and likely 2023.

Specifically, the Fed is expected to initiate two more major rate hikes, and then perhaps three smaller hikes before the year is out. That could take the fed funds rate from its current level of 0.75% to 2.50%, or even higher.

While the Federal Reserve rate doesn’t affect long-term debt like mortgage rates, it does directly influence the direction of short-term consumer debt and deposit rates. So, with several 2022 hikes yet to come, one expect CD rates to rise considerably higher as this year progresses.

That doesn’t mean you should avoid locking a CD now. But it does mean you should consider shorter-term certificates so you can capitalize on the higher rates that will be available in the not-too-distant future. Another option is to consider a special type of CD, sometimes called a “Rate Increase CD” or “Boost CD,” which allows you to trigger a rate increase on your existing CD if rates go up significantly.

Disclosure of fee collection methodology

Every business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers across the country, determining daily rankings of the highest-paying certificates in each major term. To qualify for our listings, the institution must be federally insured (FDIC for banks, NCUA for credit unions) and the CD’s minimum opening deposit must not exceed $25,000.

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