Certificate of deposit (CD) rates are at their highest level in years. It wasn’t that long ago that a 5.00% yield on a 1-year or 2-year CD would have seemed ridiculous, but now it’s rather easy to find. Today’s CD rates are due to the Federal Reserve’s interest rate hikes and the emergence of online banking.
Having said that, since CD rates have risen rather steadily for two years, many savers are naturally wondering whether they could continue to go higher. Could we see 6.00% CD yields before the end of 2024? How about 7.00%? Here’s what we know (and don’t know).
The current state of CD rates
I mentioned that CD rates are the highest they’ve been in years, but here’s some context:
- The top 1-year CDs on our radar have APYs as high as 5.50% as of Feb. 7, and 18-month CDs have similar rates.
- You can get a 2-year CD from a reputable, FDIC-insured bank with an APY as high as 4.75%.
- 5-year CD yields are a bit lower right now, but some excellent banks are offering 5-year CDs with rates as high as 4.30%.
Will CD rates go higher?
Of course, nobody has a crystal ball that tells us what CD rates will do. And the rates paid by CDs don’t have a direct relationship with benchmark interest rates like the federal funds rate.
Having said that, CD rates tend to move in the same direction as the federal funds rate, which is the rate that is typically referred to when you hear that the “Fed raised rates again.” And virtually all experts expect the Fed to start lowering rates this year.
To be sure, there is some disagreement when it comes to how soon rate cuts will start and how often they will happen. The latest projections of the policy-making members of the Federal Reserve call for three 25 basis point (0.25%) rate cuts this year. And according to the CME FedWatch tool, which essentially tells us what investors expect, the median expectation is for five 25 basis point (0.25%) cuts this year.
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However, the main point is that interest rates are widely expected to trend downward this year. And CD yields are likely to decline as well.
What it means to you
The short answer to the question “Could CD rates go higher in 2024?” is yes. If inflation were to unexpectedly rise, for example, the Fed might be forced to raise benchmark interest rates even further, which would likely lead to higher CD yields. And although virtually all experts predict that interest rates will fall as 2024 goes on, the experts don’t exactly have a perfect track record. After all, can you guess how many notable experts were calling for more than 500 basis points (5%) of Fed rate hikes at the beginning of 2022?
Having said all that, while it’s certainly possible for CD rates to go even higher, I wouldn’t recommend betting on it or leaving money on the sidelines in a savings account with the hope of getting an even better entry point into a CD. While the magnitude and speed are up for debate, the most likely scenario (by far) is that we’ll see lower interest rates before the end of the year. So if you’re thinking about putting money into a CD, now might be the right time to lock in a high rate.
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