Here’s how high CD rates could reach in 2023
There’s no way to know for sure what might happen, but here’s what you need to know.
- Thanks to rising benchmark interest rates, CDs are earning significantly more interest than a year ago.
- If the Fed continues to raise rates, CD yields could rise significantly next year.
- Here’s what you need to know about 2023 CD interest rates and strategies to consider accordingly.
Inflation hit its highest level in four decades and the Federal Reserve aggressively raised benchmark interest rates in an effort to calm things down. And as a result, interest rates on deposits have become significantly higher over the past year, making risk-free investments such as CDs much more attractive than in recent years.
While CD rates have risen sharply so far in 2022, many experts believe they could continue to rise in 2023. Here’s what CDs are paying now, where CD interest rates could be heading, and what you should do if you have spare cash.
How much do CDs cost now?
There is a ton of variation between banks when it comes to CD rates. Banks with branches tend to pay relatively low rates, while online institutions usually have higher rates. For the purposes of this discussion, we’ll be looking at the latter, as it’s usually the best way to get the most return for your CD dollars.
Since October 2022, our favorite online banks have 1-year CD rates that typically range between 3% and 3.5%, with a high of 3.6%. For 5-year CDs, most of our major banks have interest rates between 3.5% and 3.8%, with a maximum yield of 4.25%.
How high can CD prices go?
It’s hard to say how high CD rates might get in 2023, for several reasons. For one thing, there is a huge variation between the CD rates offered by different banks. Online financial institutions, in particular, tend to pay significantly higher interest rates on CDs than branch banks.
Second, CD rates are not directly tied to a benchmark interest rate. In other words, if the Federal Reserve increases the federal funds rate by 0.5%, it does not necessarily mean that CD rates will increase by the same amount.
That said, CD rates and Fed interest rate movements tend to move in the same direction over time. This is why CD rates are significantly higher than they were a year ago.
There’s no way to know for sure how aggressive the Fed will be with interest rate hikes, and much of that depends on how quickly inflation can be brought under control. With this in mind, the consensus calls for the benchmark federal funds rate to rise an additional 175 basis points (1.75%) by mid-2023. And if that were to happen, it’s fair to expect CD rates to gravitate higher as well.
Experts generally agree that CD rates are likely to rise over the next year or so, with most estimates of 5-year CD rates ranging from 4% to 5% by the end of 2023.
Should you get a CD now or wait for rates to rise?
To be perfectly clear, there is no guarantee that CD interest rates will be higher next year. In fact, if inflation is under control, it is quite possible that the Fed will start to lower interest rate in 2023, which would probably have the opposite effect. So if you have cash in reserve for a CD, it’s not necessarily the best idea to wait for rates to go up. After all, rates are already much more attractive than they were just a year ago.
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