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After 11 Federal Reserve rate increases and declining inflation, CDs are once again an investment to consider in 2023.
“The Federal Reserve has raised interest rates at the fastest pace in 40 years in the ongoing battle against inflation, with savers seeing the best returns on savings accounts and CDs in more than a decade,” says Greg McBride, CFA, Bankrate chief financial analyst. “Even once the Fed is done raising interest rates, their inclination is to leave rates at an elevated level for a period of time in order to get inflation down to 2 percent, so savers should enjoy competitive returns for some time.”
Top CDs and savings accounts are actually outpacing inflation.
But starting in 2009, in the aftermath of the Great Recession, average rates on shorter-term CDs were middling below 1 percent APY. And in the wake of the COVID-19 pandemic, the yields for all CD-terms, including 5-year CDs, plunged below 1 percent APY. But in the past year, CD rates have started to climb back up with the onset of federal rate hikes.
Today, the average one-year CD has an average yield of 2.03 percent, compared with 1.1 percent APY a year ago, Bankrate’s Nov. 29, 2023 rate survey data shows. The most competitive banks are offering APYs of more than 5 percent.
Here’s a look at the historical ups and downs of CD rates and some background on rate fluctuations through the decades.
CD rates in the 1980s
The U.S. faced two recessions in the early 1980s. That’s when CD yields peaked. On average, three-month CDs in early May 1981 paid about 18.3 percent APY, according to data from the St. Louis Federal Reserve.
The reason interest rates were so high in the 1980s was due to high inflation. With inflation, the cost of goods and services rises and your money doesn’t buy as much. And so, while savers enjoyed higher rates on their certificates of deposit, their spending power took a hit.
“Interest rates were significantly higher in the early 1980s as the Federal Reserve, led by Paul Volcker, used high rates to corral double-digit inflation,” McBride says.
CD rates in the 1990s
Following another short recession in the early 1990s, conditions improved and inflation fell. Overall, the decade was marked by a solid economy.
“CD yields dropped in the early 1990s following a recession and on the heels of the Fed’s efforts a decade earlier to break inflation,” McBride says. “Yields stabilized in the second half of the decade amid a sustained economic expansion.”
In June 1993, rates started to look normal again, with the average one-year CD yield sinking to 3.1 percent APY, Bankrate survey data shows.
CD rates in the 2000s
In early 2000, after the dot-com boom began to lose steam, the economy started to slow and the Fed lowered interest rates to stimulate the economy.
The average yield on one-year CDs fell below 2 percent APY in 2002, Bankrate data shows.
In September 2009, following the global financial crisis, the average one-year CD paid less than 1 percent APY. Average rates on five-year CDs were only slightly higher — about 2.2 percent APY.
Other rates fell, too, as the central bank slashed its benchmark interest rate.
“This decade was bookended by recessions, both of which brought about record-low interest rates for their time,” McBride says. “In the middle was a housing boom and 17 interest rate hikes by the Fed that produced a camel-back look to the trend in CD yields.”
CD rates from 2010 to 2020
The Federal Reserve’s efforts to stimulate the economy following the Great Recession of 2007-2009 left many banks flush with cash, so they didn’t need to boost rates on CDs to obtain money for lending.
CD yields reached historic lows. In June 2013, average yields on one-year and five-year CDs were 0.24 percent APY and 0.77 percent APY, respectively, according to Bankrate data.
“CD yields continued to fall in the years following the Great Recession as the Federal Reserve kept benchmark interest rates at near zero amid a sluggish economic recovery,” McBride says.
As the Fed gradually increased its benchmark interest rate between December 2015 and 2018, savers started to benefit.
“The Fed raised interest rates nine times between 2015 and 2018 before beginning a reversal of course in the second half of 2019 in an effort to sustain what by then was a record-long economic expansion,” McBride says.
Then, the COVID-19 pandemic struck in early 2020, causing a worldwide economic earthquake.
“When COVID-19 shook global economies, the Fed quickly brought benchmark rates to near-zero levels to provide fuel for a recovery,” explains McBride.
CD rates since 2020
In March 2020, the Fed made a couple of emergency rate cuts as a result of the economic lockdowns brought on by the COVID-19 pandemic.
Here’s how CD rates fell in the year after those emergency rate cuts of 2020 were made:
- From June 2020 to June 2021, the average one-year CD dropped to 0.17 percent APY from 0.41 percent APY.
- From June 2020 to June 2021, the average five-year CD fell to 0.31 percent APY from 0.6 percent APY.
“CD yields fell to new record lows when interest rates were slashed to near-zero levels in the early stages of the pandemic,” says McBride.
Average CD rates have shot up since June 2021. This is largely due to the fact that the Fed has hiked rates 11 times since March 2022, incentivizing banks to charge more on loans while also paying out more on savings products, including CDs. (The federal funds rate has an indirect effect on CDs.)
Bankrate’s Oct. 25, 2023 rates survey data shows:
- The national average one-year CD yield was 2.01 percent APY (as of Nov. 1, 2023), almost twice the average yield of 1.10 around a year earlier.
- The national average five-year CD yield was 1.37 percent APY, (as of Oct. 25, 2023), which is higher than the rate of 1.03 percent almost a year ago (as of Nov. 9, 2022).
“The big win still to come for savers and CD investors is seeing a decline in inflation,” McBride says. “The Federal Reserve may not raise interest rates much further, but a continued decline in inflation makes those savings account and CD yields look even better.”
Savers can get closer to bridging the gap between inflated costs and savings yields by comparing top CD options to find the highest rate on a term that fits their needs.
* In June 2023, Bankrate updated its methodology that determines the national average CD rates. However, all of the data in this article is based on historical data from Bankrate’s previous methodology.