Hang tight, savers — CD rates aren’t going up anytime soon, or at least not in the first half of 2021.
In 2020, both short-term and long-term CD rates gradually and regularly fell as the pandemic raged on much longer than any of us could have predicted.
To boost the economy, the Federal Reserve made an emergency rate cut back in March, pushing rates near zero and causing banks and credit unions to lower their CD rates almost immediately.
Since then, the Fed’s decision to keep benchmark interest rates pinned in a target range of 0-0.25 percent has been extended and it is expected to remain near zero in 2021 and beyond to help the economy recover.
Here’s where CD rates could go in 2021.
Rates will likely continue to fall well into 2021
Savers who managed to lock in higher rates before the economy took a big dip in 2020 are surely feeling lucky right now and will continue to feel so for the foreseeable future. Even with two approved vaccines out that are expected to eventually become more widely available, the economy will still be in catch-up mode, keeping rates low for at least the first part of the year.
Rates are also expected to remain low because banks, which are already awash in deposits, aren’t motivated to woo new customers — many financial institutions don’t need more deposits right now.
“Even at rock-bottom interest rates, banks have been inundated with deposits just as loan demand dropped off,” says Greg McBride, CFA, Bankrate chief financial analyst. “That dynamic isn’t going to change appreciably for much of 2021, though a stronger rebound in economic activity and loan demand in the latter part of the year could give yields on savings and CDs a little boost. Unless and until that happens, returns on savings accounts and money market accounts will be flat to slightly down, while CD yields meander aimlessly.”
Ultimately, rates will largely depend on what happens in the coming months with the vaccine and the economy.
CDs vs. savings accounts
Both CD and savings rates have steadily fallen in 2020 and it’s likely that this trend will continue into the new year.
Here’s a look at the national averages compared to the top-yielding accounts.
The national average for the 1-year CD term hovered around 0.22 percent, whereas the top-yielding account paid a little more than twice that at 0.55 percent. And savers who went the longer route didn’t earn much more: The national average for the best 5-year CD term was at 0.36 percent. However, the top-yielding account paid significantly more at 1.10 percent.
As for high-yield and money market savers, it’s been a slippery slope down. Currently, the national average for a high-yield savings account sits at 0.07 percent and 0.10 percent for an MMA account. The top-yielding account, however, pays 0.75 percent. A nice step up, but below the current 5-year CD term.
With CD and savings rates being somewhat comparable, the biggest perk of opening a CD is locking in a rate so that you do not have to worry about the fluctuations that come with a high-yield savings account. However, one could argue that if rates do eventually start to rise, then savers with a fixed CD term could miss out on the interest.
Regardless, CDs should be used for short- to long-term savings goals, whereas a high-yield savings account should be designated for your emergency fund, as it’s easily accessible when needed.