Are you curious about how interest rates on certificates of deposit (CDs) have evolved over the years? Look no further! In this article, we’ll take a captivating trip through time and explore the fascinating history of CD rates from 1984 to 2023.
The Influencers: Federal Reserve and Inflation
CD rates are deeply intertwined with the Federal Reserve funds rate, which is influenced by the central bank’s efforts to control inflation. When the Federal Reserve raises interest rates to combat high inflation, banks also increase the interest rates they offer on deposit accounts, including CDs.
The Roller Coaster Ride: 1984 to 1989
Let’s start our journey in the 1980s, a decade marked by back-to-back recessions and bouts of high inflation. In January 1984, three-month CD rates surged to a peak of 11.56% and then gradually declined to a low of 0.09% in June 2021. However, as of mid-July 2023, rates have rebounded to over 5%, with select banks and credit unions even offering a high 5.65% annual percentage yield (APY) depending on the term and minimum deposit.
The Players: Brick-and-Mortar and Online Banks
To fully grasp the landscape of CD rates, it’s crucial to understand where and how to buy them. Traditional CDs are savings accounts with fixed deposits and rates of return, offered by both brick-and-mortar institutions like CIT and online banks such as Quontic, Nationwide, Discover, and more.
A Graphical Insight: CD Rates and the Federal Funds Rate
The graph below illustrates the close relationship between CD rates, specifically three-month rates, and the federal funds rate over time.
Source: Board of Governors of the Federal Reserve System
Let’s Dive Deeper: Decade by Decade
1984 to 1989
This period witnessed a roller coaster ride for CD rates. After reaching nearly 12% in July 1984, rates fluctuated throughout the decade, dropping as low as 5.69% in 1986. Exceptionally high rates were mostly concentrated in 1984, with an average three-month CD rate of 8.32% by the decade’s end.
Source: Board of Governors of the Federal Reserve System
1990 to 1999
CD rates during the 1990s saw a decline due to lower inflation and an improving economy. Although the decade started with a rate of 8.42% in April 1990, it gradually dropped to 3.09% by April 1993. From then until December 1999, rates fluctuated within a range, eventually settling at 6.05%.
Source: Board of Governors of the Federal Reserve System
2000 to 2009
The new millennium brought a series of ups and downs for CD rates. In January 2000, rates stood at 5.95% and peaked at 6.73% in June. However, following the dot-com era’s end, CDs experienced a steady decline, reaching 1.04% in June 2003. The pre-Great Recession period saw rates at 5.46% in July 2006, and by December 2009, they were back down to 0.22%.
Source: Board of Governors of the Federal Reserve System
2010 to 2019
The aftermath of the Great Recession led to historically low CD rates. In January 2010, three-month rates hovered around 0.20% APY, remaining below 0.5% until November 2015. As the Federal Reserve gradually increased its benchmark interest rate, CD rates slowly rose, reaching an average three-month CD yield of 2.69% by December 2018. However, CD rates remained relatively low throughout the decade.
Source: Board of Governors of the Federal Reserve System
2020 to 2023
The COVID-19 pandemic had a significant impact on the economy and, consequently, CD rates. From February 2020 to May 2020, three-month rates dropped from 1.59% APY to 0.17%, remaining relatively stable until December 2021. However, interest rates started to rise in January 2022, resulting in a respectable 5.15% APY by May 2023.
Source: Board of Governors of the Federal Reserve System
TIME Stamp: CDs for Savvy Savers
CDs are primarily designed for saving rather than investing. They offer a secure financial instrument for long-term savings goals, such as purchasing a car or a house. With a guaranteed interest rate and Federal Deposit Insurance Corporation (FDIC) insurance protection, a long-term CD can be a perfect savings tool. Furthermore, if the inflation rate at the time of maturity is lower than when you initially invested, your earnings’ purchasing power receives an additional boost.
The Dance with Inflation
History teaches us that CD rates tend to be highest during inflationary periods. However, it’s essential to strike a balance. Locking in a rate that may increase even further if inflation persists might not be the best strategy. As rates have been on the rise but are impossible to predict long-term, you might consider short-term CDs, hoping for even higher rates in the latter part of 2023 or early 2024.
Source: U.S. Bureau of Labor Statistics
Frequently Asked Questions (FAQs)
What was the highest CD rate?
In 1981, the combination of recessions and high inflation led to rates as high as 17.52% on three-month CDs. However, when inflation rises, long-term CD rates tend not to be advantageous.
Why have CD rates been low in recent years?
The COVID-19 pandemic and low inflation, coupled with federal funds rates ranging from 0% to 0.25%, have kept CD rates low. However, as inflation and the federal funds rate increase, CD rates are on the rise again.
What can historical trends tell us about the future of CD rates?
CD rates tend to rise alongside the federal funds rate in response to increasing inflation. If you believe that inflation will continue to fall, it may make sense to lock in high long-term rates. However, if you anticipate inflation persisting or even rising, sticking with short-term CDs while hoping for higher rates in the future might be preferable.
What are the trends in long-term versus short-term CD rates?
Currently, short-term CD rates are higher than rates on long-term CDs—an unusual inverted-rate environment. Banks typically reward long-term deposits with higher rates. Over the next few years, expectations of weak growth and slow inflation will likely perpetuate this trend.
How do CD rates correlate with inflation over time?
In general, CD rates rise with inflation. The correlation is not direct, as the federal funds rate increases in response to inflation, prompting banks to offer higher CD rates to attract deposits.
And that concludes our thrilling journey through the history of CD rates! Remember, when it comes to CDs, the key is to find the right balance between saving and investing. But don’t worry, we’ll be here to guide you along your financial adventure.
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