Banking

How high will rates rise in 2023?


Rising interest rates have caused headaches for borrowers, especially those in the housing market, as the cost for loans skyrocketed throughout 2022 and this year. Savers, on the other hand, have enjoyed competitive yields on certificates of deposits (CDs) for the first time since the onset of the Great Recession. These trends are likely to get more complicated this year as inflation moderates, the Fed slows its rate hikes and the economy, possibly, slips into recession. 

Annual percentage yields (APYs) and account details are accurate as of December 21, 2023.

Average CD rates now

The average yield on a one-year CD in September 2023 was 1.76%, according to the Federal Deposit Insurance Corporation (FDIC), while a 60-month CD was 1.38%. 

While those rates aren’t exactly robust, they’re well above recent levels. For instance, a one-year CD yielded just 0.13% in January 2022, before the Fed started raising rates, while a 60-month CD offered only 0.28%. 

A rate increase of that size can make a big difference to your bottom line. 

Say you opened a 60-month CD and deposited $10,000 in January 2022 that paid a 0.28% APY. After five years, you’d earn just a little more than $140 in interest. 

That same $10,000 would net nearly $700 now. 

Remember, these yields are just averages, and low ones at that. Many financial institutions have already increased their CD rates much higher. 

Capital One, for instance, has a 60-month CD offering 4.10% APY. Using the example from above, a $10,000 deposit would result in a balance of $12,225 once it matures. 

Similarly, Bread Savings has a 60-month CD with a 4.25% APY. A $10,000 CD would bump up to more than $12,313 half a decade later.

Are CD rates going up? Our 2023 prediction

CD rates rose throughout 2023 as the Fed hiked interest rates. The Fed decided to raise rates to its highest level in 22 years in its July meeting, before pausing its rate increases during its September confab.

The more recent move comes even as the inflation report that preceded the Fed’s action showed prices staying stubbornly higher than the Fed’s 2% target. So-called core inflation, which strips out volatile food and energy prices, rests at roughly 4.4%.

“In his post-meeting press conference Fed chair Jerome Powell reiterated the central bank’s commitment to combating inflationary pressure by keeping rates higher for longer and indicated that further rate hikes are possible if the underlying economic data calls for more restrictive policy,” said Sam Millette, fixed income strategist for Commonwealth Financial Network.

The Fed hinted that it could raise rates by another 25 basis points in one of its next two meetings before the end of the year. That’s because the economy remains in a weird position.

The unemployment rate remains very low and core inflation rate is more than twice as high as the Fed’s target. That would suggest the Fed could increase interest rates without setting off a recession.

At the same time, inflation is moderating very quickly, and higher borrowing costs hurt many sectors, especially housing, which could cause consumers to pull back dramatically. Increase rates further and you might cause, well, a recession.

CD rates will rise or fall depending on how the Fed interprets its ability to manage interest rates without damaging the economy. With inflation still stubbornly high, expect CD rates to skew upward this year.

Why CD rates went up in 2022

Interest rates rose steadily throughout 2022 after the Federal Reserve increased short-term borrowing costs from almost 0% at the beginning of the year to range of 4.25% to 4.50% by December in order to force sky-high inflation to come down. The Fed has since raised rates to a range of 5.00% to 5.25%.

Before then, rates had been at historic lows for almost a decade following the aftermath of the Great Recession when the Fed slashed borrowing costs to stimulate the economy. 

But even as the economy recovered, rates remained low alongside inflation. While that was good news for borrowers, it meant dismal savings rates for individuals and businesses with cash to set aside in CDs or other savings accounts.

What is inflation and why has it spiked?

Inflation refers to the increase of prices for both goods and services over a period of time. 

The Federal Reserve targets an inflation rate of 2%; in other words, a balanced economy should experience a 2% increase in prices over time. Inflation is tracked monthly by a number of metrics so economists can gauge what’s happening in the economy and whether an intervention is needed.

In 2021, pandemic-related events caused a huge increase in prices. The Consumer Price Index (CPI) jumped 7.1% over the previous 12 months, compared to just 1.3% the year before. 

By June 2022, the CPI increased by 9.1% over-over-year.

There were a range of contributing factors to soaring prices, including supply chain issues continuing from the COVID-19 pandemic, Russia’s invasion of Ukraine and increased demand for housing. All of these issues placed upward pressure on prices.

Inflation has since moderated: Prices in May 2023 rose by 4.0% compared to the year before. That has lessened the burden of higher costs on middle-income Americans.

Price growth, however, is still well higher than the Fed’s 2% target, especially if you look at a gauge of inflation that strips out volatile food and energy prices. So-called core CPI increased by 5.3% in May, which means the Fed has more work yet to do.

How interest rates affect inflation

One of the Federal Reserve Bank’s key responsibilities is to control inflation. It does this through monetary policy, which during times of high inflation means raising short-term interest rates. 

By making it more expensive for companies and individuals to borrow money, the Fed hopes to lessen demand for products and services. That gives the economy a chance to balance out supply and demand, with the intention to cause prices to grow more slowly. 

If you’re saving rather than borrowing (or a combination of both), you’ll notice that interest rates for savings accounts are beginning to increase as well. That can give your balance a boost and help maintain your purchasing power even with inflation on the rise.

What are the best CDs?

Investors typically desire the highest yields, which is why we weighed APY heavily when we evaluated over 140 CDs offered by banks and credit unions large and small across the nation to determine the best CDs

You may notice that some of the most well-known banks are conspicuous by their absence from our best CD list. Some of the biggest banks in the nation aren’t competitive in this field as they already have plenty of deposits and don’t need to pay top rates to attract more customers.  

Yet, if you’re already a customer of a large bank, passing up on the best yields in exchange for the convenience of having your financial accounts consolidated with one provider might be worth it. 

To that end, check out our reviews on the CD rates from these banks: 

CD vs. savings account: which is better for savings?

You should have a healthy savings account before you start getting CDs. 

A traditional savings account is vital to help you start saving money and to serve as a resource when something unexpected happens, like needing new tires or covering a trip to the hospital. It’s also a great source for birthdays, vacations and holidays, so you can have a good time without needing to get a loan and go into debt. 

How much you should have in savings depends on your expenses. Ideally, you should have between three and six months of your monthly expenses tucked away. If you lose your job or something similar, it will help you to not panic because you can live off your savings for a while. 

Once you have a robust savings balance, look at the best CDs

“With a CD, there is usually a penalty if you take the money out before the maturity date,” said Caroline Tanis, a strategist at Tanis Financial Group. Before selecting one, consider when you’ll want the cash you’re deploying. 

CDs can be an ideal destination for a chunk of change that you are waiting to spend, like a downpayment. 

“I usually do not recommend CDs for much longer than a year because they rarely come close to keeping up with inflation,” Thompson said. 

Yet, going with shorter terms doesn’t mean you need to sacrifice yield. For instance, Capital One currently offers a higher interest rate on its 12-month CD than on its 60-month offering. 

Frequently asked questions (FAQs)

When you’re shopping around for a CD, you’ll see that the rates depend on the term, how much money you deposit and the bank you choose. Typically, the longer the term and the more money you invest, the higher the CD rate. 

Online banks generally offer great CD rates. By having the best rates, they make a splash and attract customers. Larger banks that are top-of-mind for many Americans have already amassed a large amount of customers and deposits already; they often don’t need to attract more by paying out top rates.

CDs are considered one of the safest investments you can make. The full faith and credit of the U.S. government backs at least $250,000 of your deposits at banks guaranteed by the Federal Deposit Insurance Corporation (FDIC). The same amount is guaranteed at credit unions by the National Credit Union Administration (NCUA). You can spread your savings out over several financial institutions for more coverage.   

You should likely open both a CD and a savings account. While CDs generally offer higher rates, savings accounts are liquid, allowing you to access your money freely. Here are the best online savings accounts.  

CD rates will continue to cruise upward for now. The Federal Reserve has announced that it will continue to increase rates to fight inflation.

The highest CD rate right now from this list is a 5.60% APY on a one-year CD term offered by Bread Savings.



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