What changes CD rates?

The federal funds rate, from which the prime rate is derived, is the target rate set by the Federal Open Market Committee. Since December 2008, the rate has been at a range of zero percent to 0.25 percent.

If the federal funds rate isn't moving but interest rates on various products are, what's driving rate changes? Below, Bankrate shows you what is causing rate changes in mortgages, home equity loans, auto loans, CDs and money market accounts and credit cards.


Despite what appears to be an improving economy, the climate for savers remains abysmal. If you need a loan these days, you're probably finding some acceptable interest rates. But consumers who are looking for a decent return on their savings still have to search far and wide.

Short-term CD rates (one-year or less) respond quickly to changes in the federal funds rate. That's a target rate set by the Federal Reserve's Open Market Committee. The rate is a gauge used by banks when they lend to each other overnight.

Then and now
ProductRate on
Dec. 18, 2008
Rate on
Aug. 5, 2009
1-year CD yield2.17%1.07%

When the economy seems too hot -- when there's potential for too much inflation -- the Fed tries to cool the situation by raising the federal funds rate to make borrowing more expensive. When the economy is sagging, the Fed makes it easier for people and businesses to borrow by lowering the federal funds rate. 

Because the federal funds rate currently is targeted for between zero percent and 0.25 percent, short-term CD rates are dismal. The average yield for a three-month CD is 0.51 percent, according to surveys. That's down 9 basis points since the June Fed meeting. The six-month average is 0.76 percent, down 13 basis points. And, the one-year has shed 12 basis points and now stands at 1.07 percent.

Longer-term CD rates are pegged to other benchmarks, such as Treasuries. The average yield for a two-year CD is 1.51 percent, while the two-year Treasury is 1.22 percent. The CD is higher to accommodate the fact that all of its earnings are taxable, while the Treasury's interest is exempt from state and local tax.

But rules are meant to be broken. The average yield for the five-year CD is 2.18 percent, while the five-year Treasury is yielding 2.73 percent. The banks simply aren't playing the game. They're not pricing their longer-term CDs to be attractive to customers. It could be because they're reaping the benefit of consumers who don't care and are willing to lock up their money for whatever return the bank is willing to pay. Or it could be because the banks are trying to drive customers to maturities that fit the banks' needs. Each bank has its own funding needs and it's not uncommon to see an institution paying more for a shorter-term CD than a longer-term CD.

Also, an institution may raise CD rates in an attempt to lasso deposits away from the competition. Many banks use higher than average CD rates to attract new customers who may end up doing other business with the bank.

Money market accounts are also tied to the federal funds rate but, again, they're a bank product and rates may be significantly better than average if a bank is looking to beef up deposits. The average money market account yield currently is 0.36 percent.

CD interest rates since December 2008

You can compare CD rates on

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