Why Do CD Rates Vary So Much?
Written by
Kathy Evans
Edited by
Elizabeth Constantineau
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Interest rates on certificates of deposit fluctuate often. What should you expect from CD rates in 2024? Here’s an overview of current CD rates and why they continuously vary.
What Are CDs and How Do They Work?
CDs are savings tools that earn interest on money invested for a pre-determined period. CDs are different from regular savings accounts because you must leave the money in your CD account for the entire term, or else you risk paying a penalty for early withdrawal.
Most CDs have fixed interest rates that you lock in when you invest. However, some have variable rates. This means that if interest rates rise after you’ve invested, you could potentially receive a higher yield on your investment.
The principal and term are important factors to consider when investing in CDs. The principal is the amount you deposit when you open your CD account. The term is the length of time you agree to leave the money you deposit in the account. Terms reach maturity after anywhere from six months to several years. After the maturity date, you are free to withdraw your money without penalty.
What Are Average CD Rates?
According to the Federal Deposit Insurance Corporation, in September 2023, the average interest rate on a one-year CD was 1.76%, and a 60-month CD was 1.38%. Since then, many financial institutions have increased CD interest rates. For example, as of April 2024, Capital One’s 12-month CD rate is APY, and its 60-month CD is APY.
What Causes CD Rates to Vary?
Depending on when and where you shop around for CDs, you may see different rates and ask, “Why do CD rates vary so much?” Here are some of the reasons that CD rates can fluctuate.
The Federal Funds Rate
The Federal Reserve sets the federal funds rate. This rate affects the amount that financial institutions charge to borrow and lend money. Consequently, the Fed interest rates influence CD deposit account interest rates, also known as annual percentage yields. When federal interest rates increase, CD APYs tend to follow. Be aware that it may take several weeks or months to see the changes.
Inflation
Although not directly connected, CD rates tend to rise with inflation. To fight inflation, the Federal Reserve usually increases the federal funds rate. CD interest rates are connected to the federal funds rate, so when the Fed benchmark rate increases, CD rates generally rise as well.
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Recession
Historically, CD rates have tracked the federal funds rate during recessions. The Federal Reserve has lowered interest rates during past recessions to spark economic growth and lower unemployment numbers. For example, in 2022, interest rates steadily increased after the Federal Reserve increased short-term borrowing costs from 0% to 4.5% to force down inflation.
Competition Among Financial Institutions
Bankers realize that CDs represent short-term relationships. After all, common CD offers are only six or 12 months.
So when the CDs mature, how do banks retain customers? Banks and credit unions may be forced to rethink their CD strategies and consider influencing factors like the ones previously mentioned, such as the federal reserve rate, higher interest rates and inflation. Competition among banks often leads to rate wars.
When Should You Buy a CD?
CDs are a safe and reliable way to save money and earn interest. Since you typically lock in your interest rate when you open a CD account, timing is important. Consider these factors when deciding the right time to open a CD.
What are Current Interest Rates?
It’s worth opening a fixed CD account when interest rates are high. If interest rates decrease during the term of your CD, you keep your higher rate regardless of interest rate fluctuation. CD rates, on average, are currently high at around 5.50% APY. It is a good time to get a CD if you qualify.
When Will You Need the Funds?
Determine when you’ll need to access your money before deciding if now is the right time to invest in a CD. Long-term CDs usually offer higher interest rates than short-term CD options. CD funds and interest rates are locked until their maturity date. So, choose your term length based on your future money needs.
Final Take
CDs offer many benefits, including fixed rates, high average returns and security. CD rates tend to vary with economic conditions. Generally, when CD rates are high, you can maximize your earnings even if rates dip in the future. Be sure to shop around for the best rates and terms that fit your financial situation and goals.
Capital one interest rates accurate as of May 9, 2024. See website for all current rates.
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- Better Money Habits - Bank of America. "What is a CD and how do they work?"
- Capital One. 2024. "Online CD Accounts + a 10-Month Special CD Rate."
- CNET Money. "Fed Rate News: Savings Rates Likely to Remain High - for Now."
