In April 2024, savers and investors alike are witnessing a remarkable advantage in Certificate of Deposit (CD) rates. These rates, hitting levels unseen in the past two decades, offer an attractive proposition for those looking to grow their savings. With some top-paying accounts boasting Annual Percentage Yields (APYs) of 5% or even more, the opportunity to optimise returns has never been more enticing. However, seizing these lucrative rates requires understanding how CDs function across various financial institutions.
A look at the current CD rates
According to data from the Federal Deposit Insurance Corp. (FDIC), the national average interest rates for one-year and three-year CDs stood at 1.81% and 1.38%, respectively, as of March 2024. However, it’s important to note that these averages only provide a snapshot of the broader market. The most competitive rates, exceeding 5%, are typically found at select banks and credit unions.
The surge in CD rates can be attributed to the Federal Reserve’s concerted efforts to curb inflation by maintaining high interest rates. Over the last two years, the central bank has kept rates elevated, aiming to stabilise inflation at 2%. This proactive approach has translated into higher returns for savers, reminiscent of the last high CD rates in late 2007.
Evaluating CD rates by term
When exploring CD options, the deposit term is pivotal in determining the interest rate banks offer. Traditionally, longer-term CDs tend to feature higher APYs, rewarding savers for committing their funds for an extended duration. However, the current market dynamics challenge this conventional understanding.
While it’s true that one-year CDs typically yield higher returns compared to shorter-term options, the same doesn’t hold for all long-term CDs. For instance, FDIC data reveals that while two-year CDs offer an APY of 1.53%, the rate drops to 1.29% for four-year CDs. This underscores the importance of conducting thorough research and comparison shopping to identify the most favourable rates, irrespective of the term.
Are CD rates on the rise?
The trajectory of CD rates is intricately linked to the Federal Reserve’s monetary policy, particularly its management of the federal funds rate. As the Fed adjusts this rate, it influences the borrowing and lending rates across the financial sector, impacting CD rates.
Recently, the Fed has incrementally raised the federal funds rate, with the latest adjustment in July 2023 bringing it to 5.25%-5.50%. Historically, such hikes have corresponded with increases in CD rates as financial institutions adjust their offerings to remain competitive. Additionally, external factors, such as the recent upheaval caused by the Silicon Valley Bank failure, have prompted some banks, particularly online ones, to raise their CD rates to retain customers.
Looking ahead, experts speculate that the Fed may maintain the status quo on rates in the first half of the year, awaiting signs of inflation converging towards its target level of 2%. However, if inflation persists above the desired threshold, rate cuts could be on the horizon, reducing CD rates along with them.
Ultimately, the current CD landscape presents many opportunities for savers seeking to maximise their returns. By staying updated about prevailing rates, evaluating options based on terms, and diligently monitoring market trends, individuals can confidently course this environment, ensuring their savings work as hard as they do.
