CD interest rate history

Opening a certificate of deposit (CD) account can be a great way to earn interest on your money with relatively little risk. Traditional banks, credit unions, and online banks can all offer CDs to savers with varying rates and terms. Understanding the history of CD rates and how they work can help decide if this is a good savings option.

Key points to remember

  • A certificate of deposit allows savers to earn interest over a specified period of time. For this reason, they are also called “time deposit” accounts.
  • Interest rates on CDs can vary widely between financial institutions, although online banks can often offer higher rates.
  • The term of the CD and the amount deposited can influence the amount of interest savers earn on CDs.
  • Getting the best CD rates means shopping online to see what different banks and credit unions have to offer.

How do CD interest rates work?

A CD account is a term deposit account, in which you agree to save money with a bank or credit union for a certain period of time and the bank or credit union pays you interest . As for how banks and credit unions set CD rates, this is ultimately influenced by movements in the fed funds rate. The federal funds rate is the interest rate at which banks lend money to each other overnight.

Banks can use the federal funds rate and other index rates as a benchmark to determine how much interest to offer savers on CD accounts, savings accounts, and money market accounts. When the Federal Reserve raises interest rates, banks can charge higher rates for loans and credit cards. But they can also offer higher rates to savers. Similarly, when the Fed lowers rates, banks may reduce the interest rates paid on deposit accounts.

This is part of how CD interest rates work. It is also important to understand how rates are applied to different CD products. Banks can assign rates to CDs based on:

  • Maturity conditions
  • Minimum deposit requirements
  • CD type

For example, banks may reserve the highest interest rates on CDs for CDs with the longest maturities or the highest minimum deposit requirements. The higher rate encourages savers to hold more money with that bank and for longer periods of time.

There may also be rate differences between different types of CDs. For example, a Raise Your Rate CD or bump-up CD allows savers to raise their rate once or twice during the term of the term. Step-Up CDs automatically increase the rate. Again, the possibility of obtaining higher rates allows banks to attract customers and encourage them to save.

Important

CDs assume that you will leave the money in your account until maturity; withdrawing money before maturity could result in a penalty.

CD interest rate history

CD interest rates have changed over time, usually as a result of movements in the federal funds rate. The 1980s are widely considered the heyday of CDs, with interest rates hovering around or above 10% for most of the first half of the decade. In March 1980, for example, 6-month jumbo CD rates reached 17.74%, a rate that would be virtually unheard of today.

High CD rates in the early 1980s are often attributed to periods of higher inflation the country was experiencing at that time. June 1979 saw the inflation rate hit 11%, a precursor to what would arguably be the worst recession in US history, following the 2007-2009 recession. In response to steadily rising prices, the Federal Reserve chose to raise interest rates.

Rate hikes are meant to have a cooling effect when the economy is overheating. They can also help contain inflation, as higher rates make it harder for consumers to borrow. Lenders may also tighten borrowing guidelines. When people spend less, prices tend to fall. A side effect of these rate hikes has been a spike in CD interest rates, with savers reaping the benefits.

CD rates remained fairly high throughout the 1980s, briefly hitting double digits in 1989. But in the early 1990s, CD rates began to level off and level off. Between January 1990 and January 2000, the 6-month jumbo CD rate fell from 8.17% to 6.15%. By January 2010, the rate for that same 6-month CD had fallen to just 0.29%.

This is not necessarily surprising, given that the economy was just beginning to emerge from the Great Recession. The Federal Reserve had cut rates to encourage consumer spending and borrowing. As a result, banks paid much lower rates to savers. As of April 2022, 6-month CDs pay 0.10% while 60-month CDs pay 0.32%.

To note

Jumbo CD accounts may feature tiered rates that pay a higher rate as your balance increases.

Can CD rates rebound?

Double-digit interest rates on CDs are a thing of the past and should remain so. Even if the Federal Reserve were to raise rates in response to rising inflation, banks are unlikely to rush to pay 10%, 15% or more interest to CD savers. So does that mean that CDs aren’t worth savers’ time?

Not necessarily. CD savings can still be a good option for people who want a safe place to keep their money while earning a virtually guaranteed rate of return. CDs can be safer than investing in the market and they can offer a better rate of return than a savings account or money market account. So where do you find the best CD prices?

Generally, online banks can offer higher CD rates for savers than traditional banks or credit unions. Online banks often have lower overheads, which means they can afford to pass those savings on to their customers in the form of better rates. They may also charge fewer fees than physical banks or credit unions.

Point

Consider raising your rate or raising your rate if you think CD rates are likely to rise during the period you’re saving.

Why were CD prices so high in the 80s?

High CD rates in the 1980s were a byproduct of the Federal Reserve’s attempts to reduce inflation by raising interest rates. As the federal funds rate rose, banks and other financial institutions offering CDs followed suit and paid higher rates to savers.

Where to find the highest CD rates?

Getting the best CD rates often means looking at online banks, which can pay higher rates to savers than traditional banks and credit unions. When comparing CD rates, also consider the minimum deposit requirements and the length of CD you’ll need to commit to to qualify for that rate.

Why are CD prices so low?

CD interest rates follow the evolution of the federal funds rate. When the Federal Reserve cuts interest rates and they stay low, banks can pay less interest to CD savers.

Conclusion

CD rates had their heyday in the 1980s before gradually settling to where they are today. Opening one or more CD accounts is something you might consider if you want to save money for a new car, vacation, or other financial goal. Searching for the best CD rates can help you find the best option to save.

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