Despite several Federal Reserve interest rate hikes, many savers haven’t seen CD rates climb as high as hoped.
Nationwide, the average 1-year and 5-year CDs pay just 0.42 percent APY and 1.01 percent APY, respectively.
“Banks continue to hold the line on deposit pricing and instead are using high interest rates as an opportunity to pass along higher rates to borrowers,” says Greg McBride, CFA, Bankrate’s chief financial analyst.
A lower rate of inflation than expected has also kept CD rates low, says Gus Faucher, the senior vice president and chief economist of the PNC Financial Services Group.
If you failed to earn a high yield in 2017, there’s a good chance that will change this year. The Fed may raise its benchmark interest rate three times in 2018. And higher inflation expectations will put pressure on rates, Faucher says.
Projecting CD rates
In 2018, CD rates will continue to gradually increase. Short-term rates should rise more than long-term rates, Faucher says.
He predicts that the average yield on a 1-year CD will grow from 0.42 percent APY to 0.6 percent or 0.7 percent APY within the next 12 months.
Today’s best 1-year CD rate pays 2 percent APY. McBride expects the top rates to surpass that mark, assuming that the Fed will continue bumping up its key interest rate.
Short-term rates will slowly increase as the Fed hikes rates. How much long-term CD yields change will depend on multiple factors, including expectations for inflation and economic growth, Faucher says.
“If inflation picks up and the Fed is getting more active because of inflation, that’s what’s really going to spur higher yields on the longer maturities,” McBride says.
Both Faucher and McBride think the average 5-year CD rate could move from 1.01 percent APY to 1.25 percent APY by the end of the year. The average 3-year CD rate could rise from 0.71 percent APY to 0.85 percent APY, McBride says.
Tips for finding the best CD rates
As the Fed raises rates, it will take time for banks and credit unions to adjust their own CD yields. Waiting for better CD deals to come along makes sense. But chasing after the best rates could be a waste of time.
“If you start trying to play this guessing game, oftentimes you get shot in the foot just because you’re never going to be right if you’re trying to make predictions,” says Brent Sutherland, CFP professional and owner of Ntellivest. “Go with what your goals are, and that should determine everything.”
In a rising interest rate environment like this one, a short-term account — like a 1-year CD — is your best bet. Avoid CDs that mature in less than a year since many of them don’t pay as much as the savings accounts with the best rates. And think twice before investing in a long-term CD.
“There’s just not enough additional yield to justify tying your money up for a multi-year period, McBride says. “The attraction continues to be shorter maturity CDs as well as the liquid accounts.”
While CD rates are on the rise, we’re living in a world where rates are relatively low compared to where they’ve been historically.
“Rates are going to top out at significantly lower levels that we’ve had previously,” Faucher says. “That’s a function of structural changes in the economy, including structurally lower inflation, slower labor force growth and slower overall economic growth both in the United States and globally.”
Consider bump-up and step-up CDs
In addition to traditional short-term CDs, you may consider buying bump-up or step-up CDs. They allow savers to take advantage of interest rate hikes by raising your CD yield either once during your CD term or at specific intervals.
Just make sure you read the fine print. And compare offers to traditional CD and savings account deals. In many cases, bump-up and step-up CDs may not be as appealing as they initially appear to be.
“Don’t categorically rule them out, but you’re going to have to turn over a lot of stones to find one that is truly beneficial,” McBride says.