CD Rates Forecast 2024: Will CD Rates Go Up? (2024)

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A certificate of deposit is similar to a savings account in that you deposit funds into an account and earn interest on the balance. However, savings accounts are “demand” accounts that let you withdraw the funds whenever you want. CDs, on the other hand, are time, or term, deposits. When you deposit money into one, you agree to not withdraw it for the term of the CD. Terms typically range from one month to five years, but 10-year CDs are not uncommon.

CDs can earn more interest than savings accounts, which is why they’re so popular. Currently, banks and credit unions are routinely offering CD rates of 4.50% to 5.00% or more — not bad considering CDs are FDIC insured up to $250,000, so there’s no risk of losing your money, even in the event your bank goes under.

Why Do CD Rates Rise and Fall?

Banks consider several factors when setting CD rates.

Federal Funds Rate

The federal funds rate is the rate at which large banks loan each other money overnight, as reported each business day by the Federal Reserve Bank of New York for the previous night. The rate serves as a benchmark for financial institutions — when it goes up, banks tend to increase their rates, and when it drops, bank rates tend to drop as well.

The Federal Reserve’s Federal Open Market Committee periodically sets a new target range for the federal funds rate as a way of implementing monetary policy. Since March 2022, for example, it has increased the target a number of times to slow the economy and reduce inflation. The target currently stands at 5.25% to 5.50% — up significantly from just prior to the first increase, when the target was 0.00% to 0.25%.

Economic Conditions

When people and businesses are optimistic about the economy, they’re more likely to borrow and invest. This competition for money can drive up rates. Alternatively, they tend to invest less when the economy is bad. In that case, reduced demand can drive rates down.

Inflation also plays a role. Inflation reduces the value of a dollar, so lending is risky when inflation is high. Say, for example, you loan a friend $100 at a 3% interest rate, and they repay you $103 over the course of a year. If inflation increases to 9% during that time, like it did in 2022, that $103 will only be worth $93.73. In that kind of environment, banks might increase rates to stay ahead of inflation.

Internal Policies

Just as retailers raise and lower prices to meet sales goals, so do financial institutions to meet their own goals. As Arnie Cabiles, founder of the financial planning and investment management firm Achievable Wealth, told Discover, balance sheets list CDs as a liability, so a bank might reduce its liabilities by reducing rates to discourage new deposits. If, on the other hand, the bank wants to attract new business, it might entice potential customers with higher rates than competitors are offering.

When Will CD Rates Go Up Again?

No one can say for sure if or when rates will go up again, but experts take cues from the Fed to try to forecast rate movement.

Before 2023, CD rates had been fairly level over the previous 10 years, save for a spike in 2017 and 2018, when the Fed raised rates to protect the job market from inflation. By 2019, rates were falling again as the Fed cut rates to pump up the economy. Things changed again in 2022, however, when the Fed began increasing rates to quell inflation. Between July 20 of that year and July 20, 2023, rates increased over 500%.

Here are national average rates for 12-month CDs over the last 10 years.

Did CD Rates Go Up in 2023?

Yes. The national average rate for 12-month CDs increased from 1.28% in January 2023 to 1.86% in December 2023.

Will CD Rates Go Up in 2024?

The Fed is taking its cues from economic data released in the days and weeks leading up to each FOMC meeting to determine whether inflation is falling quickly enough toward the central bank’s 2% target — without putting too much strain on other aspects of the economy, such as employment. However, it seems unlikely that it will increase rates again. To the contrary, the Fed is watching for signs that it’s time to start lowering the federal funds rate.

Following the April 30-May 1 FOMC meeting, Fed Chair Jerome Powell reiterated the committee’s commitment to returning inflation to its 2% target. The Fed’s recent economic projections, announced on March 20, indicated that rates could fall 0.75% this year, likely in three increments of 0.25%, and reach 4.5% to 4.75% by the end of the year.

If the projections are correct, CD rates are likely to fall in 2024. Lower federal funds rates mean lower rates on CDs.

Will CD Rates Go Up in 2025?

Forecasts that far out are highly speculative because the variables that affect rates are unknowable this far in advance. However, John C. Williams, president of the Federal Reserve Bank of New York, said in an Aug. 2, 2023, interview with The New York Times, “Eventually monetary policy will need over the next few years to get back to a more normal — whatever that normal is — a more normal setting of policy.”

Whatever that “normal” turns out to be, it’s unlikely to look like the rock-bottom federal funds rates that kept CD rates low before the pandemic. The Fed’s forecast projects a median federal funds rate of 3.75% to 4% by the end of 2025 — three-quarters of a percentage point lower than the forecast for September 2024.

Strategies for Investing In CDs

Investing in CDs is as easy as shopping around for the best rate, and then opening and funding an account through online banking at your chosen bank or credit union. Before you do that, however, it’s a good idea to devise a strategy that strikes a balance between maximizing returns and allowing access to your cash.

Rates vary by CD term, and the term also determines how long your money will be tied up. Traditionally, longer-term CDs maturing in three to five years have had the best rates, but that wasn’t true in 2023, and so far, it’s not true in 2024, either. Right now, CDs with terms of 12 months usually offer the best rates, but six- to nine-month CDs and 18-month CDs aren’t far behind. With rates projected to fall, it makes sense to go with a longer term if you won’t need the cash before the CD matures.

One way to hedge your bets, so to speak, is to build a CD ladder by purchasing CDs across a range of terms. For example, you might divide your money equally between a 12-month, 24-month and 36-month CD, and as each one matures, reinvest it in a 36-month CD. That way, you have one CD maturing each year, so you never have to wait longer than that to access some of your cash. But you also take advantage of the higher rates that typically accompany longer-term CDs.

Another alternative is the “CD bullet.” As Yahoo Finance explained, this strategy entails dividing your money between CDs with similar terms. You might invest in a 36-month CD this year, a 24-month CD next year and a 12-month CD the year after, to take advantage of shifting rate trends. Then, after three years, all three CDs mature and you can either take out your cash or reinvest it.

Should You Invest In CDs?

Rate increases since March 2022 have made CDs an excellent value that can supplement both your checking and savings account, as well as investments. The most competitive are currently earning around 5.00%, with absolutely no risk of losing your money unless you keep more than $250,000 worth in the same bank. How you should invest depends on what you think rates will do over the short and long term. Consider a shorter-term CD if you’re confident that rates will increase more. Otherwise, go for a longer-term CD that lets you lock in today’s rate. Or better yet, set yourself up to win in either case with a CD ladder or bullet.

Information is accurate as of May 21, 2024.