What Another Fed Rate Hike Means for CD Rates in 2023

Photo to accompany a story about CD strategies for 2023
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Interest rate hikes have been great for savers this year. But they’ve also made CDs a little difficult to navigate. 

All year long, we’ve seen CD rates move swiftly and consistently alongside the Fed’s interest rate increases, leading to consistent advice from experts: steer clear of long CD terms. That’s because CDs have fixed interest rates, and as rates keep rising, locking in a rate today could mean missing out on future, higher rates.

Some consumers were even hesitant to take on a short-term CD because rates moved so fast, says Kelly Luethje, CFP and founder of Willow Planning Group, a financial planning firm in New Hampshire.

Just in the past several months, the best CD rates have gone from less than 1% APY to more than 4.50% APY from some banks. 

However, a lot could change in the year to come. If runaway inflation continues to cool, 2023 could bring a slowdown to this year’s rapid rate increases. Federal Reserve Chair Jerome Powell has already signaled the Fed may move toward less-aggressive rate hikes. And while the Fed’s latest rate decision this week still increased rates, it was by a smaller 50-basis point margin, compared to 0.75% rate hikes over the past several months.

Fewer Fed rate hikes will also mean less action for CD rates. And if that’s the case, CD term recommendations could get more interesting. Here’s what you should know about choosing a CD term in 2023, according to experts: 

The Best CD Terms for 2023: Six Months to One Year

For the near future, short-term CDs are the best option for many consumers. 

The shorter the term, the better for the new year, says Joe Bautista, CFP and founder of Bautista Planning and Analytics, LLC in Lake Oswego, Oregon. You can maintain flexibility as rates rise and still get a decent return without needing to lock away your money for longer.

Plus, compared to longer terms, shorter-term CDs offer solid returns now, too, says John Boyd, CFP and founder of MDRN Wealth, a financial planning firm in Scottsdale, Arizona. Fixed interest rates from CDs are a good choice because rates are so attractive right now, he adds. 

In recent weeks, we’ve even seen averages for one-year CDs surpass longer terms. Among the high-yield CDs we track at NextAdvisor, the average one-year CD is 4.20%, while the average five-year CD is 4.05%. A shorter-term CD may yield a better return and give you access to your money sooner.

Read More: It’s a Tough Time to Buy a Home Right Now, But a Great Time to Save for the Down Payment

When to Consider Longer CD Terms

Just because experts don’t recommend long CD terms right now doesn’t mean you should write them off completely. Once inflation is tamed and federal interest rates begin to fall, long-term CDs can be a great way to lock in a high interest rate for a long time before they start going down. 

“The expectation is that inflation is going to tame at some point in 2023,” says Kevin Lao, CFP and founder of Imagine Financial Security, a financial planning firm in Jacksonville, Florida. For now, though, it’s still unclear when that may happen. When the Fed does start to drop interest rates, that could be a clear sign to lock in a longer term while rates are still high.

And for some savers, long-term CDs can be useful even today, when they’re not ideal based on current interest rate trends. For example, if you’re planning to buy a house in two to three years and want to ensure you don’t spend the deposit you’ve saved elsewhere, a two-year CD can help you keep your money safe while still earning a solid return. 

When your CD matures and you’re ready to start house hunting, you’ll have the money you saved, plus interest ready to use.

Pro Tip

If you want to take advantage of rising rates but still maintain liquidity, a CD ladder lets you stagger your CD terms to ensure that you have a portion of your money available on a regular basis to use toward a goal or to roll into a new CD with a better rate. You can still work toward long-term goals without locking away your money for years as rates continue to rise.

Bottom Line: Choose a CD for Your Goals

While short-term CDs are still the ones experts recommend most, a lot could change in how rates moved throughout 2023.

The start of the year may bring continued economic uncertainty and inflated prices, major reasons why experts like Bautista say it’s best to stick to CD terms as short as six-month CDs going into the new year.

If you have specific goals that long-term CDs could work for — if you’re approaching retirement and want safer investments, for example, or you’re saving for your wedding that’s two years away — they are a safe way to guarantee a good return. But longer-term CDs are only best if you’re more conservative with your money and won’t need it for a while, Bautista says. 

If you don’t have a specific goal for your savings right now, choosing a short-term CD helps you earn a return on the money until you need it. “If the purpose of the money is to keep the money fairly liquid, you may not even want to go a year. You might even want to stay [within] six months,” says Lao.

If you’d rather have more access to your money or want to make contributions over time, consider other savings options with still-competitive rates today, such as a high-yield savings account.

If you choose a CD, be sure to only deposit money that you won’t need to access over the entire term length. Compare terms and accounts to ensure the CD time period, fees, deposit, and account details work for you and your goals.