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What Causes CD Rates to Fluctuate?

The CD rates you see today may look different tomorrow. Here's why they change and how to find the best rate to grow your money.

Wong Yu Liang/Getty Images

A certificate of deposit is a type of low-risk savings account that can grow your money. It’s a good option if you can tuck some savings aside for a period of time. You’ll always get a guaranteed return on your cash, but the amount of interest you accrue depends on the month and year. Currently, the best CD rates are in the 5% range, but that hasn’t always been the case. 

Go back in time to look at CD rates, and you’ll see a rollercoaster rate ride. At the beginning of the 1980s, some CDs paid out nearly 20%. After the financial crisis of 2008, CD rates were hovering under 1%. 

What’s behind all those ups and downs? Let’s explore the reasons why CD rates fluctuate. 

Factors that determine CD rates

The ebb and flow of CD rates isn’t tied to one specific factor. Instead, there are many factors that influence CD rates when comparing different account options.

1. Federal Reserve rates

It all starts with the Federal Reserve. The central bank of the US meets regularly to set the federal funds rate, and any changes to that rate will indirectly impact the annual percentage yield, or APY, on CDs. The Fed doesn’t just arbitrarily decide to move rates up and down. Any adjustments are made based on what the broader economy is doing. As we’ve seen recently, the Fed has hiked interest rates to try to bring down inflation. 

“The Fed plays a big role in the economy through its setting of interest rates that have meaningful ripple effects across the economy,” said Elliot J. Pepper, certified financial planner at Maryland-based Northbrook Financial. 

2. Economic conditions

Interest rates usually drop in a recession as the demand for borrowing declines and people reduce their spending. That’s why CD rates were so low at the beginning of the pandemic following the lockdowns and subsequent job losses.

When inflation is high, CD rates will be higher. That means you’ll benefit from better returns on your savings, but since the cost of goods and services is so high, your spending power will take a hit. 

3. Term length of CDs

CDs come in a range of term lengths. Traditionally, CDs with longer terms (over one year) have carried higher rates than CDs with shorter term lengths. Investors are generally rewarded with better rates for investing over a longer period of time. 

However, the current market looks a bit different. Right now, the best CD rates are attached to shorter-term CDs (six months to one year) while long-term CDs (three to five years) have rates that are a bit lower. This “inverted yield curve” for CDs is a signal that banks and credit unions expect rates to fall in the long term. Interest rates could start to taper off before the Fed eventually makes rate cuts at some point in the future. 

4. Competition among banks

Why do CD rates vary so much from bank to bank? Because banks and credit unions have different approaches to deposit accounts depending on how many customers they want to attract. 

Big banks with established brand names like Chase and Bank of America tend to pay lower rates than, say, Synchrony and Bask Bank. Lesser-known banks or online-only banks need an offer to new customers that can make them stand out from more widely advertised financial institutions. 

How to find the best CD rates

If you want to find the best CD rates, shop around. Start with online-only banks without physical branches, which tend to offer more competitive rates. However, don’t forget to look local in your search, too. Some smaller community banks and credit unions pay rates that can beat online-only banks. 

It’s not just about the rate, though. If you’re confident that CDs can be part of your portfolio, you should consider all the different types of CDs. For example, if you don’t have a ton of money to deposit right now but will in the future, an add-on CD can be a good pick. Or if you’re concerned about early withdrawal penalties, some banks are offering competitive rates on no-penalty CDs right now.

Is now a good time to invest in CDs?

If you’re thinking about opening a CD, now’s a good time. Ted Rossman, senior industry analyst at and, believes “we’re at or near the peak” of rates. While the Federal Reserve may push rates a quarter-point higher before the end of the year, this looks like the top of the mountain for saving rates.

But that doesn’t mean rates are going to drop suddenly. Savers should benefit from above-average rates in the immediate future. “We don’t think savings rates are going to fall off a cliff,” Rossman said.

Risks to be aware of when investing in CDs

When investing in traditional CDs, remember you’ll be locking up your money for a set amount of time. If you need to access your money before the CD term is up, you’re going to forfeit some interest -- potentially a big chunk of your earnings, depending on the fine print of the bank’s early withdrawal penalties -- to get the cash. 

With a CD, you’ll earn a guaranteed rate of return, but there are some drawbacks to consider, too.

Potential to lose purchasing power: While the best CDs look promising right now, not all CD rates are worthwhile. In fact, overall average rates for one-year CDs are just 1.72%, which isn’t going to help you build any real wealth for the future, according to Casey T. Smith, president of Wiser Wealth Management. When rates are at or below the inflation rate, you’ll lose purchasing power just holding one, he said.

Potential for rates to go up: While the upside of CDs is that you can lock in your rate, that’s also a potential downside. If you lock in a one-year CD with a 5% APY today, and three months later, that same CD has a 5.5% APY, you’re going to be a bit envious of anyone who scores that extra 0.5%.

Tax considerations: The interest you earn on CDs isn’t all yours to keep. Instead, you’ll need to pay federal and state taxes on the earnings at the same rate that applies to your income. Fifth Third Bank offers a calculator that can help estimate your real returns, including the amount you’ll pay in taxes.

David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.