CD price trends, week of June 13, 2022: Prices are mostly flat
|CD term||Last week’s highest national price||This week’s National Highest Price||they change|
|6 months||1.60% APY||1.60% APY||No change|
|One year||2.26% APY||2.26% APY||No change|
|Two years||3.00% APY||2.86% APY||-0.14|
|3 years||3.25% APY||3.04% APY||-0.21|
|5 years||3.21% APY||3.21% APY||No change|
With the Federal Reserve raising rates by a quarter of a percentage point in March and another half a point in May, credit ratings increased significantly over that three-month period. As a result, CD prices since the end of 2021 have not only increased, but doubled, with this week’s highest prices double or even triple what the best CDs were paying just a few months ago.
Take 3-year CDs, for example. The highest rate on a 3-year CD available nationwide was 1.11% in late December. Today, the highest-paying 36-month certificate has a 3.04% rate.
Note that the “higher rates” listed here are the highest nationwide available rates that Investopedia has identified in its daily rate lookup on hundreds of banks and credit unions. This is very different from the national average, which includes all banks that offer a CD with this term, including many large banks that pay very little interest. Thus, the national rates are always very low, while the higher rates that you can discover by shopping are often 10 to 12 times higher.
Federal Reserve and CD Prices
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 rallies throughout the year is the Fed’s announcement of whether it is moving the federal funds rate up, down, or unchanged.
The federal funds rate does not directly determine what banks will pay customers for stock 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 above zero, it provides an incentive for banks to look to consumers as a potential source of cheaper deposits, which they then try to attract by increasing savings, money market and CD rates.
At the start of the pandemic, the Federal Reserve announced an emergency interest rate cut to zero percent, as a way to help the economy avert a financial catastrophe. For two full years, the federal funds rate remained at zero percent.
But in March 2022, the Fed started a 0.25% increase and indicated it would be the first of many. By the May 2022 meeting, the Fed was already announcing a second increase, this time by a more dramatic 0.50%.
Before the Fed makes any rate change, there is usually a reasonable understanding of what they will reveal before they actually announce it. As a result, many banks and credit unions start making anticipatory rate increases, while others choose to wait until the rate hike is solidified.
The next meeting of the Federal Reserve will be announced on June 15.
What is the expected trend of CD prices?
The Fed’s rate hikes in March and May were just the beginning. Raising rates is a way to fight inflation, and with inflation in the United States exceptionally high at the moment, the Fed is publicly planning to implement a series of several rate increases through 2022, and possibly into 2023.
Specifically, the Fed is expected to start two rate hikes, and then possibly three smaller increases before the end of the year. That could take the fed funds rate from its current level of 0.75% to 2.50%, or even higher.
While the Fed rate does not affect long-term debt like mortgage rates, it directly affects the trend of short-term consumer debt and deposit rates. So, with so many highs going into 2022, one would expect CD rates to rise much higher as this year progresses.
This does not mean that you should avoid locking a CD now. But this does mean that you should consider certifications that are short term, so that you can take advantage of the higher rates that become available in the not too distant future. Another option is to consider a special CD type, sometimes called a “CD-Rise” or “Ascending CD,” which allows you to activate a single rate increase on your existing CD if prices go up significantly.
Disclosure of pricing methodology
Every business day, Investopedia tracks price data for more than 200 banks and credit unions that deliver CDs to customers across the country, identifying daily ratings of the highest-earning certificates in each key term. To qualify for our listings, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the minimum initial CD deposit must not exceed $25,000.