CD Rates Benefit When the Fed Raises Rates, According to These Expert Predictions

Photo to accompany a story about CD interest rates and federal rate hikes
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It’s been a big year for CD rates. And the latest federal interest rate hike means rates across CD terms will only keep rising. 

The Federal Reserve has enacted a series of steep interest rate hikes over the past few months designed to lower decades-high inflation. At the same time, the best CD rates have been on a steady rise.

Among high-yield certificates of deposit we track weekly, one-year CDs currently average 3.42% APY, three-year CDs are slightly lower at 3.32%, and five-year CDs earn 3.54%. 

As federal rates continue to go up, experts say these CD rates will too — which could complicate some savers’ decisions about the best time to lock in a rate. If you’re considering a CD, rising rates could mean missing out on potential higher interest to come. On the other hand, you could also lose out by keeping a high balance in an account earning no interest at all.

To help you better understand what’s happening with CDs right now, we asked experts for their predictions for how CD rates may move throughout the rest of 2022, and advice for savers today. 

Here’s what they said:

How High Will CD Rates Go in 2022?

Averages across CD terms among the dozens of banks we track weekly are already around 3.5% APY today. Those rates could reach the 4% range by the end of this year, says Cory Moore, certified financial planner and founder of Moore Financial Planning. 

Some of the highest-earning CD accounts have already surpassed that mark: Bread Savings and Capital One, for example, both offer 4.00% on one-year CDs and 4.25% on five-year CDs right now.

But with two more opportunities for the Fed to raise interest rates this year, more CD rates could go higher, too. 

CD rates are also usually similar to Treasury bill rates, says Conor Feldmann, CFA and portfolio manager for Commas, a financial advisory firm. Treasury bills are a short-term, low-risk investment backed by the government, with terms ranging from four to 52 weeks. Right now, six-month and one-year Treasury bill rates are nearing 4.50%, which could be a positive sign for CD rates.

However, there’s another factor that could prevent CD rates from increasing much more than they have already. 

Many banks have already baked in their predictions for ongoing Fed interest rate hikes through the end of the year, and increased their CD rates accordingly. Therefore, we may only see marginal increases in CD rates through the final months of 2022 — not a drastic shift, says Feldmann. 

Read More: The Best CD Rates are Over 4%. This Week’s Savings and CD Rates

Choosing the Right CD Term for You

If you’re considering a CD today, experts still recommend choosing shorter terms (one year or less) over longer terms. 

For one, shorter-term CD rates are rising much more quickly than rates on longer terms, says Denise Downey, certified financial planner and founder of Financial Trex in Spokane, Washington. According to our analysis, many one-year CD rates are higher right now than three-year CD rates.

Plus, a short-term CD can keep your money more regularly accessible as interest rates rise.

By sticking to short-term CDs, you’ll be able to take advantage of more favorable rates in the near future, Moore previously told NextAdvisor. When the short-term CD reaches maturity, you can roll over your funds into an account with a higher rate, without having to pay an early withdrawal penalty.

Longer terms won’t see those same increases, some say. Federal interest rates may drop in 2023-2024 if the economy improves and the Fed stops its rate hikes, says Andrew Tudor, certified financial planner and founder of Alchemist Wealth, a financial planning firm. From the bank’s perspective, that means there’s less incentive to raise rates on long-term CDs and keep paying those higher rates for a long time. 

“Banks don’t want to be stuck on the hook paying a really high longer interest rate on 36 or 48 months.” 

Bottom Line

A CD can be a good option for money you want to use toward a goal within the next six months or year, says Moore. You’ll earn a fixed interest rate for a fixed term, so you can be sure how much interest you’ll get when the account reaches maturity. 

If you think a CD may work for your goals, choose a CD term length based on when you’ll need the money and compare interest rates to get the best offer. Long-term CDs may be a good option when the Fed signals that inflation is improving and rates start to drop, but for now, experts recommend sticking to short-term options.

Always remember to compare other savings options before you commit to a CD. If you want to regularly contribute to your savings over time or you’re building an emergency fund, a money market or high-yield savings account may be a better fit. You can earn a variable interest rate that may increase over time, and have the option to contribute or withdraw from your account at any time.