CDs have long offered a great alternative to traditional savings accounts in the US. Putting your money in a CD is a low-risk way to grow your savings, as the interest rates are generally higher than a regular savings account and money is insured up to $250,000 (Investor.gov). However, CD interest rates have changed significantly over time, and understanding the history of these changes can help prepare you for what you can expect rates to do in the future.
How do CD interest rates work?
Before exploring how CD interest rates have changed, it is important to understand how CD accounts work. Unlike a regular savings account, you commit to a certain amount of time, or term, when you put your money into the CD (Investor.gov). The term lengths vary, however 6-month, 1 year, 3 year, and 5 year terms are all common. The interest rate is typically higher if the term is longer, and you are likely to be penalized if you choose to withdraw money before the set term is over (Texas Republic Bank). At the end of your term, you have access to your initial investment as well as the interest it has accrued. When you decide to open a CD, you are locked into the interest rate that was offered at the beginning of your term, regardless of what might happen in the market over that time period. This means that you know exactly what interest rate to expect and can calculate your gains before you open your account.
Why do interest rates fluctuate?
CD interest rates, like most interest rates, are not stagnant. They have changed drastically over the past several decades, and the interest rate for a 6-month term is typically much smaller than a 1 or 5 year term (Deposit Accounts). While there are numerous reasons for this fluctuation, two key factors emerge: Inflation and Federal Reserve rates.
Historically, CD interest rates have been high when inflation was high. This was necessary because if the interest rates did not match inflation rates, you would not actually earn any money from your CD (Kiplinger). Federal Reserve rates directly impact banks, and these rates often fall during economic recessions. This then affects CD interest rates, causing them to drop because banks cannot afford to grow the money at the same rate as they could during a healthier economy.
What have rates done over the past few decades?
In the early 1980s, CD interest rates were at a record high with about 18% APY. This high rate was due in part to high inflation in the 1980s, and two recessions in the early 80s brought the interest rates down (Nerd Wallet). Interest rates stayed below 13% APY for the rest of the decade, but dropped significantly after the recession in 1993 (Deposit Accounts). By 1999, rates had stabilized to about 6% APY (Deposit Accounts).
Recessions in the early 2000s brought CD rates down again, bringing record lows of 2.03% in 2001. The next few years saw higher rates as the economy recovered, but 2008 brought even lower rates than before because of the recession and lower federal rates (Deposit Accounts).
CD interest rates remained low throughout the 2010s, though the numbers did fluctuate throughout the decade. Unfortunately, the pandemic has negatively impacted the economy and federal rates are low, meaning that CD interest rates are also low right now and may stay that way for a while (Nerd Wallet).
While CD interest rates are currently lower than they have been historically, there are still benefits to opening CD accounts. CDs offer a low risk way to build wealth, which is particularly beneficial in an unstable economy. They also offer higher interest rates than most savings accounts, making them a better option if you know that you will not need to touch your money for a certain period of time. You can check out our current rates here, or feel free to contact us if you have questions about opening an account!