A one-year certificate of deposit’s interest rate in 2023 might reach as high as 5.5%, which would be a figure that hasn’t been seen in more than 15 years.
After all, making large sums of money wasn’t exactly simple in 2022, and witnessing the tumultuous demise of the cryptocurrency exchange FTX could have made a boring CD paying 4% look rather decent right now.
Amazingly, finding a one-year CD with rates in the 4% to 4.5% level isn’t difficult anymore if you look around a little. And at those rates, even people in their twenties question if they should put part of their savings on hold in order to earn a little extra money.
In what amount can savers profit from increased rates?
When was the last time you overheard someone giddy over a CD? Maybe never if you’re in your 20s or 30s. Who would boast about saving $5,000 for at least a year and earning interest of perhaps $12 annually?
Greg McBride, chief financial analyst for Bankrate.com, which provides rates on a variety of products, including CDs, stated that “CDs have been off the radar for so long.”
But what if there was a possibility to earn $200 annually in interest on $5,000 in CD savings while taking on little to no risk? You’re speaking now.
Savings suffered for years as the Federal Reserve pushed short-term rates to record-low levels to stimulate the economy.
In order to combat the Great Recession in December 2008 and the subsequent economic collapse at the start of the COVID-19 pandemic in March 2020, the Fed twice pushed short-term rates as low as 0%, each time breaking new ground.
The majority of the past 20 years had seen relatively low interest rates. For instance, rates continued to decline throughout the eight-month recession that lasted from March 2001 to November 2001. Rates significantly increased from late 2005 through 2006. As the Fed attempts to reduce inflation, interest rates are now much higher.
How much can the Fed hike interest rates?
If savers shop about and lock in enticing CD rates, they may benefit from higher rates in early 2023 after a series of seven swift rate increases in 2022. The two-day meeting of the Fed slated for January 31 and February 1 will result in a 0.25 percentage point increase, according to Mark Zandi, the senior economist of Moody’s Analytics. Then, after the following two-day meeting on March 21–22, he anticipates another 0.25 percentage point increase. In that case, the short-term federal funds rate would range from 4.75 to 5 percent.
Zandi anticipates that the Fed may take a break at that time to assess whether inflation has decreased sufficiently for rate hikes to end sometime in 2023. By the spring and summer of 2024, he projects that inflation will be about at the Fed’s target level. According to other analysts, the Fed may even increase rates in 2023 with two or three rate hikes, adding up to a 0.75 percentage point increase. The target range for the short-term federal funds rate would then be between 5% and 5.5%.
Midway through 2006 was the last time the short-term federal funds rate was at 5%, while early 2001 was the last time it was at 5.5%. Early in 2023, according to McBride, one-year CD rates are projected to begin to trend up, possibly reaching a range of 5% to 5.5%. He advised investors to lock in the higher rates on one-year CDs as soon as possible.
According to Bankrate.com, the average interest on a one-year CD is presently 1.36%, with the top rates available ending up with a yield of 4%. What are some CD deals out there now?
Now, it’s not all that uncommon to drive around town and see CDs advertised on a window or electronic sign at a branch.
- In 2023, savers watch for indications of rising CD interest rates
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