What Causes CD Rates to Change?

Quick Answer

The federal funds rate, which is determined by the Federal Reserve, sets the tone for CD rates. When it goes up, CD rates typically do the same—and vice versa.

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Certificates of deposit (CDs) are low-risk investments that allow you to earn interest on your savings, but rates can fluctuate. Economic conditions and the Federal Reserve's financial goals can push CD interest rates up and down. Those rate changes could affect your returns and your investment strategy. Understanding how it works can help you decide if a CD is a good savings vehicle for you.

Why Do Banks Change CD Rates?

The Federal Reserve, which is the central bank of the United States, sets the federal funds rate. Financial institutions use this to determine the rates they offer on mortgages, personal loans, auto loans, credit card annual percentage rates (APRs) and other financial products. It also shapes the annual percentage yields (APYs) they attach to deposit accounts like CDs, money market accounts and savings accounts. When the federal funds rate increases or decreases, CD yields typically move in the same direction.

It's common for the Federal Reserve to raise its target rate if inflation is running high. That increases the cost of borrowing money, which can help rein in consumer spending, reduce demand and bring prices down. On the other end of the spectrum, the federal funds rate is more likely to decrease during a recession.

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How Often Do CD Rates Change?

CD rates don't change on a set schedule. Instead, the federal funds rate fluctuates based on the goals of the Federal Reserve. This rate decreased twice during the pandemic and reached an all-time low, but it has increased 11 times since March 2022. As of January 2024, the Federal Reserve's target range was 5.25% to 5.50%. Some CD rates are currently as high as 5.51%, but yields are expected to begin declining in 2024.

How Do Changing Interest Rates Affect Investments?

If you have money in a CD, savings account or money market account, changing interest rates can impact your returns. Let's say you put $10,000 into a five-year CD with a 1.5% yield. You'll likely be tied to that low rate, earning a total return of $150. CDs typically have fixed rates, and you can expect an early withdrawal penalty if you dip into the account before the term ends. These things can work against you if you have money in a CD and rates begin to increase.

But if yields are expected to drop, putting money into a CD could help you lock in a good rate before things change. Going back to the example above, investing $10,000 into a five-year CD with a 5.6% APY would translate to $560 in interest.

Should I Keep My Money in a CD?

Keeping your money in a CD depends on your financial position, your goals for the money and other factors.

When a CD Could Be a Good Place to Keep Your Money

Signs a CD Might Not Be for You

  • You're looking for more competitive returns. The S&P 500 has produced average annual returns of around 10% for the past century. Investing in the stock market involves more risk, but it can be a strategic part of growing your wealth over the long term.
  • You don't have emergency savings. If you lack an emergency fund, you may need to pull money from a CD if you run into a financial surprise. That could result in fees that deplete your returns.
  • You have other financial goals in mind. You might have other goals that feel more important than investing in a CD. That can include everything from buying a house to starting a business. Let your personal financial situation be your guide.

Can I Get a Rate Increase During the CD's Term?

CDs generally have fixed interest rates, but there are some workarounds to consider:

  • Bump-up CDs: These CDs allow you to increase your rate if yields rise in the middle of the term. You can usually do this one time.
  • Step-up CDs: With a step-up CD, your rate will increase on a predetermined schedule. Keep in mind that bump-up and step-up CDs often start out with lower yields than fixed-rate CDs with the same maturity period.
  • CD laddering: This involves opening several CDs that mature at different times. CD laddering can provide ongoing liquidity. When each CD expires, you can either reinvest your money or spend it as you please.
  • Money market account or high-yield savings account: These options can make sense if you want easy access to your money or the ability to make frequent deposits—and if interest rates rise, yields should go up. However, APYs usually aren't as high as CDs.

The Bottom Line

CD rates are closely linked to the federal funds rate. If the Federal Reserve decides to change it, you can expect CD yields to move in the same direction. The same goes for rates on credit cards and loans. Your personal financial situation and goals will determine if a CD is the right investment for you.