September 5, 2017 in CDs

You earned how much?! A brief history of CD rates

It’s no myth: Double-digit CD yields once existed.

Decades ago, average CD yields exceeded 10 percent APY. You won’t find a return anywhere close to that today. In fact, the average 1-year CD pays just 0.4 percent, according to Bankrate’s most recent national survey of banks and thrifts.

The downside to high CD rates? That’s an indication that inflation is high, as well, and your savings aren’t as valuable as you think.

Here’s a look at the historical ups and downs of CD rates and what yields could look like in the future. Compare current rates now to grow your savings.

Banks introduced fixed interest rate CDs in the early 1960s.

Back then — more than a decade after World War II — countries around the world watched their economies boom.

“The 60s themselves were a time period of expansion, and it was the beginning of our ramping up of the Vietnam War,” says Steve Swidler, a professor in the finance department at Auburn University.

In the mid-1960s, consumers looking to buy a 6-month CD could expect to find rates between 4 and 5 percent APY, according to data from the Federal Reserve. Soon thereafter, rates began to rise.

“Those sort of controlled rates went away when you saw the volatility that really started in the late ’70s and ’80s,” says Ted Beck, president and CEO of the National Endowment for Financial Education.

Calculate how much interest you could earn with a CD today.

By 1973, the U.S. found itself in a full-blown recession.

“I think the big thing was paying for a big, expensive war that we were waging in the 1960s and early 1970s led to rapid inflation,” Swidler says.

Trying to combat high inflation and high unemployment, the Fed flip-flopped between raising and lowering interest rates. Unemployment dipped slightly, but inflation climbed.

CD rates trended up in the late 1970s. In 1979, the average 6-month CD yield hit 11.42 percent APY. Compare that to today’s top short-term CD rates.

“It was a combination of accelerating inflation in the early ’70s and then tight monetary policy in the late ’70s that pushed up CD rates relative to what we had in the ’60s,” says Gus Faucher, senior vice president and chief economist of the PNC Financial Services Group.

The U.S. faced two recessions in the early 1980s. That’s when CD yields peaked. The highest average 6-month CD rate was 15.79 percent APY in 1981.

“The reason why the interest rates were so high in the ’80s is that we had that runway inflation,” says Jerry Lynch, a professor of economics in Purdue University’s Krannert School of Management.

While savers enjoyed higher rates on their certificates of deposit, their spending power took a hit. Find out how much interest you could earn on a CD these days.

“With inflation rates being so high, your purchase power might not actually have been that good because it was being eroded by inflation,” Beck says.

Following another short recession in the early 1990s, conditions improved and inflation fell. Overall, the decade was marked by a period of economic bliss.

“The Fed didn’t need to run monetary policy as tight,” Faucher says. “It’s kind of the flip side of what we saw in the ’70s and ’80s, kind of a low inflation, low interest rate environment.”

CD rates started to look normal again. After sinking to 3.12 percent APY in 1993, the average rate on a 1-year CD rose to 4.47 percent APY in 1999. Find out how today’s rates on CDs and savings accounts stack up.

“Money became less expensive and that brought down CD rates,” Beck says.

In early 2000, the economy started to slow. Hoping it would pick up speed, the Fed lowered interest rates.

“Money was so cheap,” Lynch says. “The Fed was trying to pump money into the economy to kind of get it going again.”

The average yield on 1-year CDs dipped below 2 percent APY in 2002. In 2009, after the financial crisis, the average 12-month CD paid just 1.16 percent APY. Average rates on 5-year CDs were slightly higher (2.21 percent APY).

Other rates fell, as the central bank brought its key interest rate down to its lowest point possible.

“You saw overall rates decline,” Beck says. “If you were to go back to the 1970s or ’80s and say that somebody could get a mortgage rate with a three in front of it, they would’ve laughed at you because that was just unheard of.”

The Federal Reserve’s efforts to stimulate the economy following the Great Recession left many banks flush with cash. Banks held on to their extra funds, so they didn’t have to boost rates on CDs to obtain money for lending.

CD yields reached historic lows. In 2013, average yields on 1-year and 5-year CDs were 0.24 percent APY and 0.8 percent APY, respectively.

A decade after the Great Recession, they’ve barely budged. The average 1-year CD rate is now 0.4 percent APY, according to Bankrate’s most recent national survey of banks and thrifts.

Much of that, Faucher says, is due to the actions of the Fed and central banks worldwide.

“It’s a product of the global low interest rate environment, which is in turn a function of monetary policy both in the U.S. but also overseas.”

With the Fed gradually lifting interest rates, savers could eventually see CD yields rise. But it’s hard to predict how quickly or slowly banks and credit unions will act.

Lynch doesn’t expect much change in yields anytime soon.

“I think CD rates are gonna be sticky for a while,” he says. “They’re not out there competing to get funds that they can turn around and lend out. They have all the funds that they want right now.”

As far as where CD rates are headed years from now, it’s hard to say.

“Tell me where inflation is and tell me what the Fed decides to do,” Beck says. “Those are the variables that will drive it. So to say it’s going to be at a certain point, I think, would be pure guesswork.”

Methodology

For 1964-2000, 6-month CD rates are averages of available daily rates on the secondary CD rates from the Federal Reserve’s H15 series. Data for 1964 is partial and data for the 1960s decade is partial. For 2001-2017, rates are averages of Bankrate’s weekly national survey.

One-year and 5-year CD rates are averages of Bankrate’s weekly national survey from 1984-2017. Because averages begin in 1984, the decade average for the 1980s is based on incomplete data.