When Will CD Rates Go Up and Which Banks Pay the Highest Rates?

Mohit Oberoi, CFA - Author

Sep. 10 2021, Published 8:14 a.m. ET

CD (Certificate of Deposit) has been a popular saving tool especially for older people and those looking to park their money for the short term. In the past, CDs used to yield double-digit annual returns. Fast forward to 2021 and most CDs don’t even yield 1 percent. When will CD rates go up again and which banks pay the highest rates currently?

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While CDs aren't the highest-yielding savings option, they're considered to be very safe. CDs issued by FDIC-insured banks are insured for up to $250,000 per depositor.

Why CD rates are so low

The current CD rates are even lower than inflation. While your capital and interest are safe, you end up losing in real terms. Simply put, by parking money in a CD, you aren't even making returns to match inflation, which is running at multi-year highs.

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Usually, you would expect interest rates to be higher than the inflation rate so that you earn at least some real interest rate, which is simply the interest minus inflation. If you're wondering why CD rates are so low despite multi-year high inflation, here are the reasons.

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First, the Federal Reserve went on unprecedented monetary policy easing and slashed rates to zero bound in March 2020 in response to the COVID-19 pandemic. Now, CD rates are a function of the Fed rates only, just like yields on other debt assets.

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There's another side of the story as well. The fiscal stimulus has left too much money in the hands of investors, a lot of which is finding its way into the banking systems. Now, for banks, the loan growth has been much lower than the deposit growth. This demand-supply mismatch has also been fueling a decline in CD rates.

When will CD rates go up again?

Now, for CD rates to go up again, the Fed has to cut back on its hyper accommodative stance. No one expects the U.S. central bank to raise rates in 2021. However, even if the Fed starts tapering, for which officials have been giving conflicting signs, we could see some uptick in CD rates.

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Meanwhile, the Treasury yields have also come off their 2021 highs. The yields don’t necessarily go up after the actual rate hike. Instead, it's a reflection of what the market believes the Fed’s policy would be. Earlier in 2021, yields had spiked amid fears of inflation and sooner-than-expected tightening by the Fed.

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Many analysts were forecasting yields on the 10-year Treasury note rising to 2 percent. However, the yields have come down. Looking at the still uncertain economic environment, which was highlighted by the weak August jobs report, the Fed will maintain its accommodative stance.

Looking at the current picture, the Fed should begin tapering sometime in 2021. This should help bring at least a modest increase in CD rates.

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Which banks pay the highest CD rates?

Comenity Direct has an annual rate of 0.7 percent for one year and 0.75 percent for two years. If you're looking at CDs for the long term, Quontic Bank pays a 1 percent annual interest for a three-year CD and 1.11 percent annual interest for a five-year CD. Looking at the current rate environment, it might not be prudent to go for a longer-term CD currently.


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