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When the Fed raises interests rates, CD yields can rise, too

CD rates are on the upswing. After bottoming out in January 2022, they have been on a steady march higher. How much further they will rise depends on a number of factors, such as Federal Reserve actions. The length of the CD term and where you deposit your money will impact your returns, too.

The average yield on a 1-year CD bottomed out at a measly 0.14% in January 2022, according to Bankrate.com. That figure then rose to 1.45% in February 2023. 

Today, many institutions offer even better returns. For example, Tropical Financial Credit union was paying 4.40% on the same 1-year term in late February.

Will those numbers go higher? Financial institutions look to the Federal Reserve for direction. It sets the rates for what banks pay to borrow money from each other. The independent government agency bumped its federal funds rate a quarter-point to a range of 4.5% to 4.75% on Feb. 1, 2023. That was the eighth consecutive increase since March 17 of the previous year.

Banks tend to follow the Fed’s lead, particularly on their prime rate, the loan rate they charge to their most creditworthy customers. Financial institutions have historically been slower to raise savings rates as fast or as by much.

More often than not, the impact is greater on short-term savings yields. As of February, a 1-year CD was paying a higher return than a 5-year CD, according to Bankrate’s national survey. Why? Because while financial markets are concerned about inflation now, they are less worried about it in coming years. Rightly or wrongly, they see the U.S. economy slowing down some time in 2024 or 2025.

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Here’s how to be a smart shopper for a CD when rates are rising or falling:
  • Pay attention when the Federal Reserve raises its key interest rate. In the weeks that follow, financial institutions are likely to up their CD rates, too.
  • Find the term that pays the highest yields. In the first quarter of 2023, the best returns could be found on 1-year CDs.
  • Look for specials, such as CDs with odd-numbered maturity periods like 11 or 13 months. They may pay higher returns than those with a conventional 12-month or 18-month terms.
  • Always read the fine print. That enticing, advertised yield may be available only if you deposit $10,000, $25,000 or even $100,000. If you open an account with the minimum dollar amount, the rate may be much, much lower. 

For more information on savings and how to get the most for your money, visit our savings web page.

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