After more than a decade of low yields, certificates of deposit (CDs) finally started to make sense as a destination for your savings the past couple of years. All it took was the Federal Reserve hiking short-term interest rates in a bid to slow sky-high inflation resulting from the economic fallout from the COVID-19 lockdowns.
To get a sense of our current moment, it’s worth taking a look at historical CD rates, in addition to reading the Fed tea leaves, to understand where yields may head in the future.
Prior to the turn of the century, savers could count on earning a robust 5.0% on a three-month CD. However, all that changed as Americans endured the dual economic recessions that bookended the 2000s.
First was the tech bubble burst. The Federal Reserve, led by then Chair Alan Greenspan, cut rates to give the economy some juice, before reversing course a few years later as the housing market inflated.
When the bubble popped and the Great Recession began, the Fed cut rates to near zero for several years. Rates wouldn’t substantially tick up until 2018, when Chair Jerome Powell wanted to stave off rising inflation.
The Fed reversed course in 2019, before returning rates to near zero in 2020 as the pandemic struck and economies across the globe were shuttered.
The 1960s might be remembered for a great number of things: the Beatles, for instance, or the Vietnam War; perhaps even bubble wrap.
But the ‘60s also ushered in one of the most important economic events of the post-World War II period: the Great Inflation.
Beginning in the middle of the decade and spanning until the early 1980s, the Great Inflation was a period of energy shocks and recessions. Policies that were later deemed misguided, such as price controls, were established in an effort to shave off the peaks and fill in the troughs.
Prices grew at an average annual rate of 1.5% between 1952 and 1965. By 1966, though, prices were up by 4.5%, before rising to 5.75% in 1969, an almost two decade high.
The Fed reacted by increasing interest rates, thereby boosting CD yields, but inflation marched ahead.
More economic disruption occurred during the 1970s.
The dollar was finally de-anchored, American car owners confronted an oil embargo and meat prices grew so high that even Archie Bunker (the main character in the popular sitcom All In The Family) had to change his diet. The average annual inflation rate for the decade was 6.85%, more than 4 points higher than all of the yearly average in the ‘50s or ‘60s.
But, as you can see in the CD rate data, prices moved all over the place; not just up.
The price growth between 1972 and 1974 was driven by high food and energy costs, as well as President Nixon ending his ill-fated price control program. When those inflationary pressures abated in the subsequent few years, price growth decelerated for about four years, only to soar again by 1978, again driven by higher costs for food, energy and mortgages.
The result? By the end of the decade, savers could enjoy a cool 11.23% on a three-month CD.
The Great Inflation was finally snuffed out in the early 1980s.
Fed Chair Paul Volker, who was appointed in 1979, made it his mission to cure the nation of stagflation; a period of both high inflation and high unemployment. (This was a phenomenon that economists previously thought all but impossible.)
As he assumed office in late summer 1979, prices were growing by 11% compared to the previous 12 months, while the unemployment rate was around 6%.
He set about increasing interest rates until the inflation fever broke. It was tough medicine and the unemployment rate climbed to almost 11% by the end of 1982. But it worked. Inflation peaked at nearly 15% in the middle of 1980, before dropping to roughly 3% just three years later.
Savers reaped the benefits by being able to net a three-month CD of almost 18% in 1981.
The Fed set about cutting interest rates in the beginning of the 1990s, during the Gulf War, dropping borrowing costs by nearly five points as the nation endured a nasty recession for the first time since Volker had set about curbing inflation.
While it became cheaper to take out loans and endure debt, savers got the short end of the stick. A three-month CD yielded about 3.70% in 1992, which was roughly 10 points lower than a decade earlier.
As the economy rebounded and entered into a golden period, the Fed nudged rates higher, causing CD rates to likewise increase.
Three-month CD yields averaged just about 6.50% in 2000, as the Fed hiked rates to cool down an overheated, tech-inspired economy. Short-term yields have yet to recover to that level.
Shortly thereafter, the tech bubble burst, followed by the 9/11 terrorist attacks.
It would take a few years for the economy to bounce back, but it did by the middle of the decade, driven in large part by the home real estate market.
When home prices plummeted, traders lost big on mortgage-backed securities and related derivatives, driving the economy into a freefall. The Fed responded to the Great Recession by purchasing trillions in bonds and dropping interest rates to near zero. CD rates followed suit.
Despite the Fed pumping trillions of dollars into the economy and keeping interest rates as close to zero as it could, the economy only grudgingly recovered from the Great Recession.
The good news was that inflation was low, but that also meant savers earned precious little for their cash. For instance, a three-month CD netted just 0.12% in 2014.
Towards the end of the decade, though, the economy finally started to heat up. By 2018, wages were growing and inflation was rising, so much so that the Fed lifted interest rates to its highest level since before the Great Recession.
And, despite cutting rates in 2019, that year ended with the highest short-term CD yield since 2008.
Best CD rates by term
Frequently asked questions (FAQs)
The highest annual average for a three-month CD in recent history was 15.91% in 1981 thanks in large part to then-Fed Chair Paul Volker’s efforts to rein in stagflation.
The Fed has paused rate hikes for several meetings now and market observers are expecting the Fed to lower rates beginning this summer. For rates to increase, high price growth would likely have to reappear.
CD rates are most likely headed down since the Fed is expected to cut the federal funds rate. However, rates are still high by recent historical standards and you can find great yields from the best CDs rates available.
