CD rates fluctuate based on the federal funds rate, which changes to accommodate economic shifts. Rates hit an all-time high in 1980, with a three-month CD hitting up to 18.65%. In recent years, CD rates have risen due to the Feds raising interest rates after the pandemic.
Where we are now: 2020-2024
During the COVID-19 pandemic, the Federal Reserve slashed interest rates to zero to help stimulate the economy, which gave us historically low CD rates, as these have a direct relationship with each other. As interest rates stalled, so did income, as many rely on CD returns as a significant part of their savings strategy. Investors turned to different options to get better yields in such a low-interest rate environment.
As the economy began to recover in 2021 and 2022, the Fed started increasing rates. By 2023 and 2024, CD rates started to rebound. Since July 2023, however, the Fed has kept rates steady. Despite this rebound, CD rates remain low compared to historical averages. Currently, the best CD rates hover near 5% annual percentage yield (APY).
CD rates from 2010 to 2019
After the Great Recession, we saw a slow and steady recovery in CD rates. At first, rates were low because of the Fed’s policies to help stimulate the economy. As it improved, rates began to rise, although gradually. The stimulus measures helped stabilize the economy and restore confidence, but low interest rates remained, resulting in relatively modest CD rates.
This led to increased competition amongst banks eager to earn business, prompting them to offer slightly higher rates as well as CD specials to attract savers. However, with inflation outpacing rates—less than 0.5% APY for part of the decade—CDs were much less appealing.
CD rates in the 2000s
At the beginning of the decade, rates were high—around 6% APY—due to a strong economy, partially influenced by the tech boom in the 1990s. CD investors looking for reliable returns found these conditions favorable.
Then, the dot-com bubble burst early in the decade, and the 9/11 attacks led to economic uncertainty, which led to the Fed lowering its rates. After the housing boom mid-decade, rates increased again, which provided attractive rates for a short time before the 2008 financial crisis marked by the housing bubble popping. Rates plummeted to historical lows by the end of this decade.
CD rates in the 1990s
The 1990s began with a mild recession. However, with the rapid advancement of technology sectors and increased productivity, the economy recovered, with rates hovering around 8% APY. People enjoyed both economic expansion and low inflation, resulting in stable CD rates.
As we neared the 2000s, the economy strengthened along with the job market, helping maintain higher CD rates. With the economic growth and stability they provided, CDs were an attractive option without the volatility seen in other decades.
CD rates in the 1980s
With the highest CD rates in history, thanks in part to double-digit inflation and aggressive Fed policies, CDs became a cash cow with rates as high as 18.65% in December 1980. Jason Ray, president and chief information officer (CIO) of Zenith Wealth Partners, explains, “Back then, the economy was grappling with the aftermath of the 1970s oil crisis, leading to double-digit inflation rates. The Fed’s aggressive interest rate hikes were a necessary, albeit painful, measure to bring inflation under control.”
Early in the decade, the Fed’s efforts to combat inflation led to incredibly high interest rates, which allowed investors to lock in substantial returns on CDs.
Rates started to decrease after inflation was controlled but were still higher than today’s rates. The aggressive monetary policy in the early 1980s had long-term effects on CD investors’ strategies.
How to choose CDs based on your goals
The first thing to consider when choosing a CD is your financial goals. Are you saving the money for retirement? Perhaps you’re looking to make a few dollars before you need the money for a down payment on a vehicle this fall, in which case a short-term CD is better for your situation. In turn, you’re getting lower interest rates, but you still have better liquidity than a long-term CD.
Knowing your goal can help you determine how long you have to tie your money up in a CD and whether another investment option would be better. For example, if you’re saving for retirement but won’t be retiring for another 50 years, you might be able to afford more risk in your portfolio than someone who retires in two years.
Long-term CDs, such as those longer than a year, usually offer higher interest rates. However, this isn’t always the case, especially with CD specials or in high-interest-rate environments. The trade-off with long-term CDs is reduced liquidity—if you need access to your funds before maturity, you’re going to pay an early withdrawal penalty for removing the funds.
Will CD Rates Continue To Go Up?
The future of CD rates will depend on the Fed’s policies as well as the broader economic environment. The Fed might raise rates to help keep inflation in check, which would lead to higher CD rates. However, if the economy slows or enters a recession, the Fed might lower rates to stimulate growth, which results in lower CD rates.
FAQs
What was the highest CD rate?
In December 1980, we saw the highest CD rate on a three-month CD. Its rate was 18.65%, according to the St. Louis Fed.
What Are Today’s Highest CD Rates?
“As of mid-2024, the highest CD rates for a one-year term are hovering around 5.50% to 5.75%,” according to Andrew Tudor, Certified Financial Planner (CFP), Chartered Advisor in Philanthropy (CAP). However, CD rates vary by banking institution, term, and amount invested. Shop around to find the best CD rates for your specific needs.
Why have CD rates been so low in recent years?
After the COVID-19 pandemic, the Fed has held a near-zero interest rate policy with the aim to help stimulate the economy. This is meant to encourage borrowing and spending to support economic recovery rather than saving. Jason Ray recounts, “I recall discussing with an institutional client about how frustrating it was to see their cash reserves compound so slowly despite diligent cash management practices. Eventually, they adjusted their investment policy statement and diversified into higher-yield investments, such as corporate bonds and money market funds, to seek better returns.”
What predictions can be made about the future of CD rates based on historical trends?
Tudor says, “Historically, CD rates have moved in tandem with the Fed’s interest rate changes. If the Fed continues to raise rates to curb inflation, we can expect CD rates to rise accordingly. Conversely, if the economy slows down, and the Fed lowers rates to stimulate growth, CD rates will likely decrease.” Monitor economic indicators and Fed announcements and adjust your investment strategy accordingly.
What are the trends in long-term vs. short-term CD rates?
CD rates are usually higher on long-term CDs compared to short-term CDs because of the duration an investor is required to tie up their money. However, this isn’t always true, especially in high-interest rate environments. This is because banks anticipate rates eventually lowering and prefer to offer better rates with short-term investments.
How do CD rates correlate with inflation over time?
Tudor explains, “CD rates generally rise with inflation because higher inflation often leads to higher interest rates set by the Federal Reserve to control price increases. However, the correlation isn’t perfect, and there can be delays. For example, during periods of high inflation, CD rates may not increase immediately if banks are slow to adjust their rates.” Over time, CD rates tend to align more closely with inflation trends as banks respond to the Fed’s rate changes.
What Happens to CD Rates in a Recession?
CD rates usually decrease when the Fed lowers interest rates to stimulate the economy. This makes CDs less attractive compared to other periods. Ray gives us examples: “During the 2008 financial crisis, the Fed slashed rates, leading to a significant drop in CD rates. Similarly, during the COVID-19 pandemic, the Fed’s emergency rate cuts resulted in some of the lowest CD rates in history.”