Key takeaways:
- Certificates of deposit (CDs) are thought of as an ideal way to diversify savings accounts
- December 1980, a short-term three-month CD earned as much as 18.65% APY, now the average three-month rate is currently above 5.35%.
- Historically CD rates have been a good way for investors to gauge the market and fluctuating economic actions driven by the Federal Reserve and private bank activities..
- For 2024, CD rates remain stable; however, near-term Fed decisions could change this direction.
Traditionally, certificates of deposit (CDs) are thought of as an ideal way to diversify savings accounts, allowing individuals to allocate a portion of their savings and, in return, receive a fixed annual percentage yield (APY).
However, market conditions are continuously changing, often impacting the performance of specific capital assets. This is particularly true in the case of CDs, which have usually been impacted by a changing interest rate environment.
At the turn of the year, interest rates have remained historically high, following eleven consecutive rate increases over the past couple of years. With inflation beginning to stabilize and the U.S. Federal Reserve still deciding on a possible rate cut, potentially halfway through the year, it could make sense for savers to purchase a long-term CD.
Experts often argue that periods of recessionary concerns and slow economic activity provide a suitable environment for CDs to leverage better annual yields. However, as conditions begin improving, with inflation falling and interest rates being loosened, savers will notice their CD rates steadily dropping again.
Throughout history, CD rates have been influenced by various economic factors but remain mostly sensitive to changing interest rates. This year is nothing different from the last several decades of CD performance, and a look back will help pull back how CDs are influenced by rising and falling interest rates.
CD Rate Performance In The 1980s
Economic conditions throughout the 1980s witnessed record-breaking federal fund rates, soaring inflation, and high unemployment. By the beginning of 1981, the Federal Reserve fund rate was standing at 19.08% and inflation was nearing 12.06%, while unemployment ticked over to more than 7.5%.
The lead-up to the recession meant that banks and credit lenders followed in the footsteps of the reserve banks, lifting their interest rates and prompting attractive rates for short-term CDs. By December 1980, a short-term three-month CD earned as much as 18.65% APY, according to the Federal Reserve Bank of St. Louis.
Compared to modern standards, CD rates during the 1980s were coupled with double-digit inflation and federal fund rates. High unemployment meant that the government was targeting ways to introduce more cash into the economy without further overheating conditions.
The decade was marked by two separate recessions, starting the 1980s at 13.39%, falling to 7.80% by 1985, and ending off at 8.32% by December 1989. Even by the late 1980s, three-month CD rates started to bottom around 5.69% and remained well above the five percentile until the early 1990s.
Source: Federal Reserve Bank of St. Louis
CD Rate Performance In The 1990s
By the turn of the decade, interest in technology stocks started picking up and the dot-com bubble started to pick up traction. CD rates remained relatively stable throughout the 1990s as interest rates trended downwards.
By April 1990, the three-month CD rate peaked at 8.42%, marking the highest point in the decade. Several years later, CD rates started sliding more, and by December 1995, the average three-month CD rate ended December at 5.62%. At the end of the decade, rates were stable at 6.05%.
By 1992, interest rates reached a low of 2.66%, coming down from the 10.39% recorded a year earlier. By July 1995, interest rates were trending upward towards 6% before the Federal Reserve loosened its monetary policies, and before the turn of the century, interest rates were 3.99%, ending the decade lower than it started.
A rally of technology stocks fueled by internet and software companies helped bolster stock market sentiment. However, as history has taught us, by March 2000, stock valuations had reached unsustainable levels, and capital had started drying up, seeing the NASDAQ fall from 5,048 points to nearly 1,139 between March 2000 and October 2002.
By the end of 2001, most technology and internet-focused companies that experienced tremendous growth during the dot-com bubble had failed, leaving investors with cold feet for tech companies, which only started seeing improved support around the later years of the 2010s.
Source: Federal Reserve Bank of St. Louis
CD Rate Performance In The 2000s
Economic activity significantly slowed following the collapse of the dot-com bubble in March 2000. The economy started slowing, and the Federal Reserve reacted by lowering interest rates in an attempt to continue stimulating the economy.
Interest rates remained relatively flat throughout much of the early to mid-2000s. By June 2004, interest rates started picking up, although the average yield on one-year CDs was still below 2%.
CD rates averaged 6.59% throughout the decade, although the rates on six-month CDs fell to 3.66% during 2001, again to 1.81% in 2002, and then bottomed out at 1.71% in 2003. For most of the decade, CD rates were fluctuating, however, at the beginning of the Great Recession and financial crisis between 2007-2009, the average six-month CD rate fell to 3.14%.
By 2009, as the economy struggled, and foreclosures mounted, six-month CD rates fell again, bottoming at 0.87%, reaching the lowest rate recorded in more than five decades. With the global financial crisis in full swing, by September 2009, the average one-year CD paid less than one percent APY. Even the five-year CD was below the decade average, paying 2.2% APY.
To counter the economic reaction, the central bank slashed its prime rate, and in December 2010, interest rates were standing at 0.11%, only reaching 0.21% by April of the same year. The central bank wouldn’t raise interest rates for another five years until December 2015, when the bank’s prime rate rose to 0.36%, the second highest since November 2008.
CD Rate Performance In The 2010s
The next ten years were seemingly uneventful, with the central bank sticking to low interest rates – near zero – and CD performance seeing slight but modest improvements following the global financial crisis.
The years following the housing market crash left investors and savers looking towards more liquid capital assets instead of keeping the cash in the bank. The six-month CD rate averaged 0.42% to 0.44% between 2010 and 2012 and dropped below 0.15% the following year, in 2013. Similarly, the 12-month CDs were still under one percent. There was little to be excited about, with interest rates below one percent and hitting a 10-year high of 2.68% in December 2018. Similarly, CD rates were flat for the majority of the decade, starting in January 2010 at 0.22% and ending December 2019 at 1.79%.
Source: Federal Reserve Bank of St. Louis
Short-term CDs provided the most competitive rates compared to long-term CDs. Similarly, short-term CDs had better APY compared to previous years, with the 12-month CDs rising from 0.20% to 0.30% throughout 2017. Both the six-month and 12-month CDs rose to 0.40% and 0.60%, respectively, between 2018 and 2019.
Even long-term CDs were not paying anything above 1.22%, with 60-month CDs seeing a slight improvement in 2018 – 2019 when rates rose above 1.10%. Overall, the decade witnessed historically low CD rates while unsuspecting volatility was looming ahead.
CD Rate Performance 2020 – Now
The next couple of years were unusual, to say the least. By March 2020, the federal fund rate fell to a historic low as the central bank tried to curb the possibility of a recession following the outbreak of the COVID-19 pandemic.
Months-long restrictions and border closures meant that business activity was at an all-time low, and interest rates continued to trend downwards. In April 2020, interest rates remained flat at 0.05% until June, when rates slightly picked up to 0.07%; by December, rates were still at 0.09%, and the central bank kept its balance sheet historically low.
By the beginning of 2022, the economy started warming up as restrictions were lifted and economic activity returned to normal. By early 2021, inflation started picking up, reaching a high of 4.7% after falling to 1.7% the year before. In March 2022, things were starting to heat up further, with inflation trending upwards, peaking at 9.1% in June 2022, the highest in nearly four decades.
During the same time, the central bank introduced its monetary tightening policy, looking to bring down inflation and counter the possibility of a recession.
With lending rates going up and the Federal Reserve tightening their balance sheet with the fastest and biggest interest rate increases in more than two decades, CD rates quietly rose alongside higher debt costs.
In October 2022, all three of the 12-month, 3-year, and 5-year CDs rose above 1.0% APY for the first time since July 2011. Continued interest rate hikes meant that CD performance was relatively elevated, and by mid-2023, the 12-month CD rate was at 1.72%, while the 5-year CD rate was paying 1.37% APY.
By the half-way mark of 2023, the central bank started relaxing its monetary tightening, using unemployment data as a gauge to measure economic activity. Annual inflation had fallen from 7% in 2021 to 3.4% in December 2023.
Federal fund rates remain high at a range of 5.25% – 5.5%, with the average interest rate sitting at 5.33% since July 2023. During this time, CD rates managed to see slight improvements, and throughout 2023, CD rates moved above 3.00%.
Source: Federal Reserve Bank of St. Louis
At the beginning of 2024, banks had already lifted their short-term CD rates above 5.00%. Some national banks had increased their 12-month APY to 5.30% by the turn of the year. However, conditions are likely to change in the coming months, especially as the Federal Reserve begins to deliver an indication of whether it will start lowering interest rates halfway through 2024.
There is some indication that rates have rebounded as the Federal Reserve continues it’s higher-for-longer strategy. This year has already shown that some regional banks and credit unions are now paying as high as 5.51% APY, although it’s not certain that rates will continue to stay on this pace as the central bank starts to indicate a possible rate cut as early as September 2024.
Currently, experts believe that the central bank will likely keep interest rates higher for longer until it manages to reach its 2% inflation target rate. This would mean that CD rates will likely react to the lower interest rates, which could bring both short and long-term CD rates down from their current high.
CD Rate Forecast 2024
While talks of a possible recession are still on the cards, the Federal Reserve is likely to keep interest rates higher for longer, with the possibility of lowering its fund rate by September 2024.
The reaction would most likely mean that CD rates will trend downward. However, experts are not yet certain how big of a rate cut we will likely see this year. More importantly, the frequency of rate cuts has been scaled back from five to roughly three or potentially two.
This could allow investors and savers to take advantage of high CD rates while interest rates remain above average before the central bank looks to start its quantitative easing process on the economy.
Many believe that now could be one of the best times to buy CDs, with rates at their highest in more than 15 years. However, current forward-looking guidance would mean that many individuals would lose out on short-term gains should interest rates come down drastically.
The current sentiment is that CDs with high APYs could help bolster portfolio performance, should investors hold for a maximum period and those not seeking immediate liquidity.
| Average Annual Percentage Yield (APY) For January vs Federal Fund Rate | ||||
| Year | 3 Month | 1-Year | 5-Year | Federal Fund Rate |
| 2010 | 0.20% | 0.91% | 2.14% | 0.18% |
| 2011 | 0.49% | 0.52% | 1.57% | 0.10% |
| 2012 | 0.40% | 0.33% | 1.22% | 0.14% |
| 2013 | 0.23% | 0.23% | 0.84% | 0.11% |
| 2014 | 0.15% | 0.20% | 0.75% | 0.09% |
| 2015 | 0.54% | 0.20% | 0.78% | 0.13% |
| 2016 | 0.87% | 0.21% | 0.79% | 0.39% |
| 2017 | 1.54% | 0.22% | 0.78% | 1.00% |
| 2018 | 2.69% | 0.29% | 0.89% | 1.83% |
| 2019 | 2.59% | 0.61% | 1.25% | 2.16% |
| 2020 | 1.65% | 0.48% | 0.94% | 0.37% |
| 2021 | 0.17% | 0.15% | 0.28% | 0.08% |
| 2022 | 4.51% | 0.13% | 0.28% | 1.69% |
| 2023 | 5.49% | 2.38% | 1.21% | 5.03% |
| 2024 | 5.32% | 1.86% | 1.40% | 4.60% |
How to invest in Certificates of Deposits (CDs)
Historically, certificates of deposits or CDs have been considered a beneficial investment vehicle for individuals looking to save and secure their money. CDs can be a smart way to further diversify your portfolio and are often considered another way to save for specific goals that may offer a guaranteed return on investment.
Traditional Banks
One of the best ways to start investing in CDs is by looking at which banks offer the best yield and interest rates on a specific term that matches your long-term goals. Typically, banks will offer a yield closely related to the current interest rate, which can be beneficial for savers looking to leverage a higher interest rate environment.
Currently, some banks offer an annual percentage yield (APY) between 4.50% – 5.30%. These returns will depend on the term of the CD, which can range from three months to one year, three years, and five years. Typically, longer-term CDs are considered to be more promising in terms of their APY return, however, this can change depending on the interest rate set by the Federal Reserve.
Online Banks
Online banks which are often referred to as neobanks may provide a similar service, allowing individuals to purchase and hold CDs for a specific term. One of the biggest upsides of investing in CDs through an online bank is the variety of options available, allowing for better comparison in terms of management fees, APY, and product availability.
On the other hand, online banks typically don’t have a brick-and-mortar location, which may cause some obstacles for older and less tech-savvy savers. Without a physical presence, individuals will solely have to rely on the information provided by the bank, however, the ability to apply and track CD performance online makes this option a lot more user-friendly.
Some of the biggest online banks that provide certificates of deposits include Ally and Marcus offered by Goldman Sachs. Other names include EverBank Basics, BMO Alto, Alliant, and LendingClub.
| Return On CD Accounts Per Account Providers | ||||
| Account Provider | 6 Months | 1-Year | 3-Years | 5-Years |
| Alliant Credit Union | 5.00% | 5.15% | 4.15% | 4.00% |
| Bank of America | 0.03% | 0.03% | 0.03% | 0.03% |
| Barclays | 4.85% | 5.00% | 3.50% | 3.75% |
| CapitalOne | 4.25% | 5.00% | 4.00% | 3.90% |
| Discover | 4.25% | 4.70% | 3.75% | 3.75% |
| HSBC | 4.00% | 4.80% | N/A | N/A |
| LendingClub | 5.00% | 5.15% | 4.30% | 4.00% |
| Marcus by Goldman Sachs | 5.10% | 5.15% | 4.15% | 4.00% |
| NASA Federal Credit Union | N/A | 4.50% | 4.25% | 4.00% |
| Pen Fed Credit Union | 3.00% | 4.00% | 3.40% | 3.20% |
| Sallie Mae | 4.80% | 5.15% | 4.00% | 4.00% |
| Synchrony Bank | 4.80% | 4.80% | 4.15% | 4.00% |
| TotalDirectBank | 5.51% | 5.35% | 3.56% | 3.05% |
| Wells Fargo | 2.50% | 1.50% | N/A | N/A |
Brokerage Firm
Working with a brokerage firm could provide individuals with more peace of mind, as brokers will typically evaluate a person’s financial goals and timeline to determine the best possible CD product. A brokerage firm can act as a sort of middleman linking you with the appropriate CD opportunities.
Using a brokerage firm can be the best possible way to ensure you have access to the right sort of products and all the necessary information that accompany these investment vehicles. A broker may also advise on specific near and long-term goals, allowing you to make more informed decisions, and curate your portfolio that it aligns with your overarching financial goals.
Something to keep in mind, however, is that a brokerage firm may charge a handling and account management fee. Depending on the type of CD product, you may be charged a subscription or commission fee. On the bright side, you’re unable to withdraw your funds before the term expiration date, meaning that you will need to keep your CD for the designated time or sell it if you decide to withdraw your funds early.
With a brokered CD you may be fortunate enough to receive a higher APY compared to those from traditional banks. Popular brokerage firms that offer brokered CDs include Vanguard, Fidelity, and Charles Schwab.
Credit Unions
For the best possible fees and returns on certificates of deposit, you can consider working with a credit union. These institutions may offer more competitive APY returns, although this may depend on the term of the product.
With a credit union, you may have the same number of CD options to choose from, similar to a traditional or online bank, although there may be different costs and fees involved. On the upside, however, unlike online banks, most credit unions will have physical locations, which could be beneficial for individuals who want to speak to a broker or representative in person.
There are different credit unions to choose from, and depending on where you reside, you may have the option to partner with a state-specific credit union. Options to choose from include Sallie Mae, Andrews Federal Credit, and Apple Federal Credit Union.
Things To Consider When Investing In CDs
While it’s possible to make a lucrative return on certificates of deposits, individuals will need to consider some factors beforehand:
Savings Goal: Make sure to have a savings goal in mind, as this will help you determine the length and term of available CD products. Additionally, you will need to consider how much money you are willing to put towards CDs and whether this works with your financial position.
Length of Maturity: Next you will need to decide the length of time you are willing to invest in these instruments. As mentioned, some CDs can have shorter periods of maturity, such as three, six, or twelve months. However, there are some CDs with a longer maturity period, anything from one year and longer. Decide whether you will need the money in the next couple of months, or years and how these investments will align with your overarching savings goals.
Compare Rates: Before buying, make sure that you have compared various rates, including the fine print of each CD product. Some institutions may offer you a better rate but would require you to hold onto the CD for a designated period, without the opportunity to withdraw your funds. This might limit some people, especially if you require the money in an emergency. Make sure that you have compared different products against your financial goals.
Consider Penalties And Fees: Each institution will have different fees, depending on the type of product. Additionally, there could be penalties for instances where you withdraw funds before the designated maturity date. Although these fees and penalties might not seem like a lot at first, over time these can quickly begin to accumulate, costing you more of your savings.
Types Of CD Investment Strategies
If you’re not still sure how to invest in CDs you apply one of the following strategies to ensure maximum return on investment and diversification of your portfolio.
CD Ladder Strategy
One of the basic ways of investing in CDs involves the ladder strategy, which would see you investing money in high-maturity CDs over time. With this strategy, you can invest your money in different CD maturities over time, instead of tying up all your cash in investment for a designated period.
With a CD ladder, you begin to stack CD products over time, allowing you more leverage and the ability to access funds once a maturity date has passed and reinvest that money into a different CD or in another investment vehicle.
CD Barbell Strategy
Another strategy would be to invest in short and long-term CD products instead of midrange options. This would include CD options with terms under one year and those with terms of five years or longer.
This strategy allows you to put more capital towards longer-term CDs, which would most likely provide you with a higher return, while still having access to capital in the short-term.
CD Bullet Strategy
Savers who have specific time or financial goals in mind can use the bullet strategy. With this strategy, you invest more capital in a CD with a term ending by the time you need the money.
Say for example you’re thinking of buying a house in five years. Your first step with this strategy would be to buy a five-year CD, which will mature by the time you require the money to make a downpayment on your house. In the year after, you may buy a four-year CD and then a three-year CD, until you’ve maxed out the number of years you’re saving up for.
With this strategy, you maximize your return potential and receive all the money at the time of your down payment. This will minimize your need to tap into additional savings accounts, and having to stock away more funds for your down payment.
Something to keep in mind is that interest rates may fluctuate over time, which could make it more beneficial to direct your capital towards the first or longer-term CD.
Frequently Asked Questions (FAQs)
Will CD rates come down in 2024?
There is an overall consensus shared among many experts that CD rates will most likely come down from their current peak as the Federal Reserve anticipates a potential interest rate cut this year. As inflation trends downward, and interest rates come down, it’s expected to see short-term rates fall.
Why have CD rates been higher in recent years?
CD rates tend to move with the current interest rate set by the U.S. Federal Reserve. In recent years, the central bank has lifted interest rates to combat rising inflation and an overheating economy. CD rates mirror the primary interest rates set by the Federal Reserve.
What should you consider about investing in CDs based on historical performance?
The response of CD rates is typically locked in with the overall performance of the wider economy. As inflation decreases, and interest rates fall, many will notice an overall decline in their CD rates. Due to these fluctuations, it’s best to lock in rates for longer, as banks tend to reward depositors who deposit their capital for longer periods.
Should you invest in CDs right now?
Current short-term CD rates are relatively stable, however, slower growth and cooling inflation could bring down rates in the near term. Experts suggest investing in long-term CD rates with the current best benign 5-year CDs holding an APY above 4%. Some 1-year CDs currently offer rates above 5%.
Why are CD rates higher for shorter terms?
Current short-term rates are higher compared to longer-term rates as we’re currently seeing an inverted yield curve, which corresponds to inflationary conditions and the expectation of a recession. Short-term rates tend to be higher before an economic downturn.
The Bottom Line
At the end of the day, CD rates remain cyclical and are measured in strong correlation with current economic developments and interest rates. There has been a clear pattern throughout history that shows CD rates increasing as interest rates rose on the back of improving economic conditions.
While certificates of deposits can be seen as a more traditional investment opportunity, they provide more long-term benefits, and can often lower a person’s access to liquidity.
With the likelihood of interest rates coming down this year, and perhaps again in 2025, those interested in CDs should take advantage of higher rates, before these start coming down again. CDs can be a wonderful way to save and improve your capital leverage, however, careful planning and consideration of long-term financial goals can help determine a person’s direct need and the most suitable CD option that can deliver the most profitable returns.
Methodologies
This article was created using data sourced from the internet including The Federal Reserve Bank of St. Louis, The Board of Governors of the Federal Reserve System, and official statistics compiled by the Bank of America. Data relating to the performance of 3-month, 12-month, and 60-month certificates of deposits between 1970 and 2024 were analyzed to determine both the highest and lowest performance periods. Additionally, data relating to the federal funds rate was closely monitored, and then compared to the performance of specific CDs to determine their growth or decline during certain economic periods, including recessions, and periods of economic expansion. By conducting this comparison, it was possible to determine the overall influence of federal fund rates against the performance of CD rates and yields over time and to conclude whether there is a correlation between changes in federal fund rates and CD performance.
