The Federal Reserve and CD Rates

The Federal Reserve’s rate-setting committee holds meetings every six to eight weeks to decide whether to move the federal funds rate up, down, or keep it unchanged. The federal funds rate does not directly determine the rates banks pay customers for CD deposits, but it does provide an incentive for banks to adjust their rates accordingly. This article will explore how the Federal Reserve’s actions impact CD rates, and provide a few key takeaways to consider when shopping for CDs.

How Does the Federal Reserve Impact CD Rates?

When the Federal Reserve increases the federal funds rate, banks tend to increase their CD rates in order to attract more customers. This is because higher rates make CDs more attractive to potential customers, and banks can make more money by offering higher rates. On the other hand, when the Fed lowers the federal funds rate, banks often lower their CD rates as well in order to remain competitive. This means that CD rates are directly impacted by the Federal Reserve’s rate decisions.

It’s important to note that the federal funds rate does not directly dictate what banks will pay customers for CD deposits. Instead, the federal funds rate is simply the rate banks pay each other when they borrow or lend their excess reserves to each other overnight. However, when the federal funds rate is something higher than zero, it provides an incentive for banks to adjust their rates accordingly.

Related Facts

The FDIC publishes a monthly report of national CD averages. The February data shows that the biggest jump this month was just 10 percent, seen among 6-month CDs. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 10 to 15 times higher.

In December 2021, the highest rate on a nationally available 3-year CD was 1.11%. Today, the top-paying 36-month certificate boasts a rate of 4.84%. This indicates that the continued ratcheting up of the federal funds rate since last March has catapulted deposit interest rates by orders of magnitude.

Key Takeaway

When the Federal Reserve increases the federal funds rate, banks tend to increase their CD rates in order to attract more customers. On the other hand, when the Fed lowers the federal funds rate, banks often lower their CD rates as well in order to remain competitive. It’s important to note that the federal funds rate does not directly dictate what banks will pay customers for CD deposits, but it does provide an incentive for banks to adjust their rates accordingly. Thus, CD rates are directly impacted by the Federal Reserve’s rate decisions.

Conclusion

The Federal Reserve’s rate decisions have a direct impact on CD rates, and it’s important to understand how these decisions can affect your savings. Shopping around for the best CD rates is an important part of maximizing your returns, and understanding how the Federal Reserve’s rate decisions can influence CD rates can help you make more informed decisions.