Rates for certificates of deposits have been on a roller-coaster for the past few decades.
Even though many people refer to today’s rates as high, in comparison to historical data, rates aren’t as high as they were decades ago. If you shop around, you can find CD rates above 5%, depending on the bank and term. That’s better than significantly lower rates following the Great Recession, but not quite as high as the double-digit CD rates we saw in the 1980s.
Here’s a closer look at where CD rates have been and where they’re going.
The history of CD rates from the 1980s to today
Over the past four decades, CD rates have experienced many changes. Starting In the ’80s, CD rates were relatively high and began to slowly drop to near zero following the Great Recession. In recent years, CD rates have started to climb again -- but not quite to the levels we saw in the past.
CD rates in the 1980s
Amid back-to-back recessions and high levels of inflation, CD rates surged to almost 20% in 1981. As the cost of goods and services increased, and the power of the dollar declined, people who saved were able to get double-digit returns on their CDs.
“Interest rates were significantly higher in the early 1980s as the Federal Reserve used high rates to corral double-digit inflation,” said Greg McBride, chief financial analyst for CNET sister site Bankrate.
During the summer of 1984, the average APY on a six-month CD dipped to under 11%. By the fall of 1984, six-month, one-year and five-year CDs had fallen below 10%. By the end of the decade, CD rates dropped below 8%.
CD rates in the 1990s
As inflation cooled and the economy rebounded, interest rates declined. In 1993, the APY on a one-year CD was 3.10%. By the end of the decade, rates had reversed course, and the average one-year CD APY had increased to almost 6%.
CD rates in the 2000s
In the early 2000s, the average CD interest rate varied between 4% and 5%. But as the dot-com boom of 2000 faded and the economy slowed, the Fed lowered interest rates to spur activity. By 2003, the average CD APY had dropped precipitously: The average six-month CD offered an APY under 1%. During the Great Recession (2007 to 2009), CD interest rates dropped from around 4% to less than 1%.
CD rates in the 2010s
In the aftermath of the Great Recession, CD rates dropped to all-time lows. The Fed’s efforts to stimulate the economy provided a cash windfall to banks, which grew less interested in offering competitive yields to bring in deposits. In late 2013, the average five-year CD offered a 0.78% APY, and a six-month CD yielded only 0.14%.
“CD yields continued to fall in the years following the Great Recession as the Federal Reserve kept benchmark interest rates near zero amid a sluggish economic recovery,” McBride said.
As the Fed increased its benchmark interest rate between 2015 and 2018, CD rates inched up. By late 2019, the average five-year CD yield had increased to 1.37%.
CD rates since 2020
In February 2020, the average five-year CD yielded 1.14%. As the COVID-19 pandemic unfolded, it had a dramatic effect on the economy. Inflation was low prior to the pandemic, but prices began to surge for a variety of market reasons (supply chain issues, lower supplies, increased demand, to name a few). Following this, the US experienced a broad increase in the prices of goods and services, raising the inflation rate. The labor market also played a role in the uptick in inflation, particularly as the ratio of job vacancies to unemployment rose.
By the end of 2020, the yield had fallen to 0.39%. CD rates continued to drag into 2021, with the average five-year CD offering a 0.26% APY. In March 2022, the Federal Reserve first raised the federal funds rate by 25 basis points -- the first of many rate hikes that would be made to tamp down on rising inflation. Banks followed suit, raising interest rates on consumer products like credit cards, loans and savings accounts. This led CD APYs to slowly increase, from 2022 to now, with some of the best rates topping 5%.
Inflation topped out at 9.1% year over year in June of 2022 -- the largest increase in 40 years. Inflation is now at 3.1% for the previous 12 months, as of November 2023, closer to the Fed’s 2% target. With inflation nearing the central bank’s goal, it has begun holding rates steady. And in 2024, the Fed predicts it will begin lowering rates for the first time since 2020. That has experts predicting that CD rates have hit their peak and will slowly decline at some point in 2024.
How do CDs work?
A CD is a type of savings account that earns a fixed rate of interest as long as you don’t touch the money for a set amount of time. After that set time, known as the term, ends, you can withdraw your money and the earned interest. If you withdraw it early, you’ll pay an early withdrawal penalty, typically by forgoing a few months’ interest.
In most cases, CDs with longer terms and higher minimum deposits will earn a higher APY, compared with shorter-term CDs. However, over the course of 2023, short-term CDs, like six-month and one-year options, have been offering higher APYs than most long-term options.
You may receive your CD interest monthly, quarterly or annually depending on the bank, your CD term, your initial deposit and the type of CD. You can typically choose to have the interest paid out to you in a separate account to be used immediately or to deposit the interest into the CD to get the benefit of compounding more interest.
What is the federal funds rate and how does it affect CD rates?
The term federal funds rate refers to the target interest rate range set by the Federal Open Market Committee, setting the rate at which commercial banks borrow and lend their extra reserves to one another overnight.
The Federal Reserve’s FOMC meets eight times a year to set this target interest rate. Changes to this rate affect CD APYs. When the federal funds rate goes up, CD interest rates also tend to rise and vice versa.
Are CDs a good option for savers?
CDs at federally insured banks and credit unions offer a safe place to grow your savings at a fixed interest rate compared with riskier investments such as stocks. A CD is a great option to store money you may want to save for a goal in the future. Short term CDs (those one-year and under) are ideal for funds you plan to use in the next six to 12 months such as for a vacation, a new car or a down-payment on a home. If you don’t need to access your funds for several years, putting your cash in a longer term CD, like a three- or five-year CD, can help you earn even more interest. Because a CD isn’t as liquid as a regular savings account, you remove some of the temptation to spend the money you are saving for those bigger goals.
If you want to deposit money regularly and access it on demand, a high-yield savings account is a better option. But savings interest rates also fluctuate according to market conditions. So if the Fed cuts rates, your savings rates may decrease too.
How to find the highest CD rates
Comparison shopping is the best way to find the highest yield on your money. Reviewing rates from major banks, credit unions, smaller local banks and online lenders will help give you a comprehensive view of the rate environment. You’ll also want to consider other factors, such as the minimum deposit amount, fees, customer service, convenience and terms.
The bottom line
Studying historical CD rates over nearly four decades provides a glimpse into how market factors can affect the ways Americans manage their savings. Factors impacting the broader economy -- from inflation to supply chain backlogs -- require the Federal Reserve to respond with changes in interest rates. Those changes then impact the rates that banks offer on CDs.
There’s no way to predict how future events will impact the economy, but you can take advantage of the rising rate environment to boost your savings in a product that guarantees a fixed rate of growth. Deciding on how long your term should be will depend on how long you can afford to keep your money tied up without withdrawing it to avoid early withdrawal penalties. And those decisions must be based on your circumstances and long-term financial goals.
First published on Oct. 21, 2022, at 6:59 a.m. PT.
