The Federal Reserve has raised interest rates eight times since the beginning of 2022 to stem historic levels of inflation, with more rate hikes rumored to be on the horizon. Such increases translate to higher interest rates when you borrow for a mortgage, auto or personal loan -- but also higher yields on savings accounts and certificates of deposit. Opening a CD can be an effective way to save and grow your money in a high-rate environment.
Here’s an overview of how CD rates have changed since the 1980s.
The history of CD rates from the 1980s to today
In the 1980s, CD rates were relatively high: The average APY for a five-year CD in July 1984 was 11.80%. “Interest rates were significantly higher in the early 1980s as the Federal Reserve used high rates to corral double-digit inflation,” according to Greg McBride, a chartered financial analyst and chief financial analyst for Bankrate, CNET’s sister site. In the mid-2010s, “CD yields continued to fall in the years following the Great Recession as the Federal Reserve kept benchmark interest rates near zero amid a sluggish economic recovery.”
Read on for a decade-by-decade breakdown of how CD rates changed.
CD rates in the 1980s
Amid back-to-back recessions and high levels of inflation, CD rates surged to almost 20% in 1981. As the cost of goods and services increased, and the power of the dollar declined, people who saved were able to get double-digit returns on their CDs.
During the summer of 1984, the average APY on a six-month CD dipped to under 11%. By the fall of 1984, six-month, one-year and five-year CDs had fallen below 10%. By the end of the decade, CD rates dropped below 8%.
CD rates in the 1990s
As inflation cooled and the economy rebounded, interest rates declined. In 1993, the APY on a one-year CD was 3.10%. By the end of the decade, rates had reversed course, and the average one-year CD APY had increased to almost 6%.
CD rates in the 2000s
In the early 2000s, the average CD interest rate varied between 4% and 5%. But as the dot-com boom of 2000 faded and the economy slowed, the Fed lowered interest rates to spur activity. By 2003, the average CD APY had dropped precipitously: The average six-month CD offered an APY under 1%. During the Great Recession (2007 to 2009), CD interest rates dropped from around 4% to less than 1%.
CD rates in the 2010s
In the aftermath of the Great Recession, CD rates dropped to all-time lows. The Fed’s efforts to stimulate the economy provided a cash windfall to banks, which grew less interested in offering competitive yields to bring in deposits. In late 2013, the average five-year CD offered a 0.78% APY, and a six-month CD yielded only 0.14%.
As the Fed increased its benchmark interest rate between 2015 and 2018, CD rates inched up. By late 2019, the average five-year CD yield had increased to 1.37%.
CD rates since 2020
The COVID-19 pandemic had a dramatic effect on the economy. In Feb. 2020, the average five-year CD yielded 1.14%. By the end of that year, the yield had fallen to 0.39%. CD rates continued to drag into 2021, with the average five-year CD offering a 0.26% APY. Today, as the Fed works to control inflation by increasing its benchmark federal funds rate, CD rates are climbing once again. The beginning of 2023 has seen five-year CD rates as high as 4.50%. Experts are predicting additional rate increases through the second half of the year.
How do CDs work?
A CD is a type of savings account that earns a fixed rate of interest as long as you don’t touch the money for a set amount of time. After that set time, known as the term, ends, you can withdraw your money and the earned interest. If you withdraw it early, you’ll pay an early withdrawal penalty.
Interest rates can yield monthly, quarterly or annually depending on your term, your initial deposit and the type of CD. In many cases, CDs with longer terms and higher minimum deposits will earn a higher APY, compared with shorter-term CDs.
What is the federal funds rate and how does it affect CD rates?
The Federal Reserve’s Federal Open Market Committee sets this target interest rate eight times a year. This affects the annual percentage yield, or APY, earned on a CD. When the federal funds rate goes up, CD interest rates go up, and vice versa.
Are CDs a good option for savers?
CDs at federally insured banks and credit unions offer a safe place to grow your savings at a fixed interest rate compared with riskier investments such as stocks. But higher rates tend to be reserved for accounts with longer terms and higher deposit minimums. If you’re comfortable with stashing away your savings for several years, putting your cash in a five-year CD is a solid way to earn interest on your savings.
If you want to deposit money regularly and access it on demand, a high-yield savings account is a better option. But savings interest rates also fluctuate according to market conditions. So, if the Fed cuts rates, your savings rates may decrease, too.
How to find the highest CD rates
Comparison shopping is the best way to find the highest yield on your money. Reviewing rates from major banks, credit unions, smaller local banks and online lenders will help give you a comprehensive view of the rate environment. You’ll also want to consider other factors, such as the minimum deposit amount, fees and terms.
The bottom line
Studying historical CD rates over nearly four decades provides a glimpse into how market factors can affect the ways Americans manage their savings. Factors impacting the broader economy -- from inflation to supply chain backlogs -- require the Federal Reserve to respond with changes in interest rates. Those changes then impact the rates that banks offer on CDs.
There’s no way to predict how future events will impact the economy, but you can take advantage of the rising rate environment to boost your savings in a product that guarantees a fixed rate of growth. Deciding on how long your term should be will depend on how long you can afford to keep your money tied up without withdrawing it to avoid early withdrawal penalties. And those decisions must be based on your circumstances and long-term financial goals.
First published on Oct. 21, 2022 at 6:59 a.m. PT.