If inflation slows, CD rates are poised for a comeback
Following CD rates in recent years has been a lot like watching paint dry at the bottom of a barrel: little perceptible change in rock-bottom returns.
Yields on certificates of deposit have been in the tank for years, particularly since the pandemic began. But things are about to change.
“The next 12 to 24 months will be a period of rising interest rates, meaning improving CD returns,” said Greg McBride, chief financial analyst at Bankrate.com.
“It won’t be great, but at least things now are moving in the right direction, which is more than we’ve seen” in years, he said.
On the downside, inflation has been heating up — it’s the worst in 40 years — which quickly gobbles up any returns on deposits.
“Interest rates have to go up a long way and inflation has to come down significantly before it becomes a winning combination for savers,” McBride said.
The Federal Reserve earlier this month ramped up its fight against inflation by raising its benchmark interest rate by a half-percentage point to a range of 0.75% to 1%. That’s the highest level since COVID-19 emerged some two years ago.
More increases likely are on the way. The Fed is expected to approve a similar half-point hike in June and July, said Gus Faucher, chief economist at PNC Financial Services Group.
“The rate will end this year above 2% and end next year around 3%,” he said, which will boost short-term borrowing costs including credit card interest rates, shorter-term car loans and home equity lines of credit.
Long-term rates such as home mortgage rates have already shot up as the Fed signaled its intent to stop buying the longer-term Treasury and mortgage-backed securities that it had been purchasing to aid the economy.
The average 30-year mortgage rate — which fell to an alltime low below 3% in 2020 — has risen more than two percentage points since December, from 3.27% to 5.38%. That’s the highest since 2009.
Faucher expects the average 30-year mortgage to end the year between 5.5% and 6%.
As for CDs, rates have begun to edge higher, too.
Annual yields on oneyear certificates are averaging 0.15%, up from 0.13% a year ago, Bankrate.com notes. Yields on five-year certificates are averaging 0.39%, up from 0.32% a year earlier.
But depositors willing to shop across the country can snag way better returns. People shouldn’t be afraid to do business with out-of-town financial institutions as long as those institutions are federally insured, McBride said.
He expects the highest-yielding one-year CDs nationwide to climb to around 2.25% by year end with five-year certificates topping out at around 3.25%.