At its last policy meeting in July, the Federal Reserve raised the target for the federal funds rate, a key overnight bank lending rate, to a range of 5.25% to 5.50%. It was the 11th rate hike since March 2022 as part of the central bank's campaign to reduce inflation to 2%. While this makes borrowing money more expensive, it also increases the annual percentage yield (APY) you could get on a savings account or certificate of deposit (CD).
Is now a good time to invest in CDs? Here's a look at the advantages and disadvantages.
What is a CD?
A certificate of deposit or CD is a type of savings account that typically carries higher yields compared to standard savings accounts or money market savings. It locks your money away for a set term, ranging from three months to ten years.
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The annual percentage yield on the CD doesn’t change for the entirety of the term. So if you have a five-year CD at a 5.00% APY, you would keep your rate even if the Fed slashes rates during that time.
Best current CD rates
While CDs are available for as few as three months, the larger yields are typically found with terms of at least one year. If you’re looking for the highest available CD rates, we’ve compiled the top rates for 1-year CDs, 3-year CDs, and 5-year CDs.
1-year CD rates
USAlliance Financial
APY: 5.40%
Minimum Deposit: $500
Popular Direct
APY: 5.50%
Minimum Deposit: $10,000
CIBC Bank USA
APY: 5.36%
Minimum Deposit: $1,000
3-year CD rates
U.S. Senate Federal Credit Union
APY: 5.13%
Minimum Balance: $1,000
Quorum Federal Credit Union
APY: 4.85%
Minimum Balance: $1,000
Lafayette Federal Credit Union
APY: 4.84%
Minimum Balance: $500
5-year CD rates
Lafayette Federal Credit Union
APY: 4.68%
Minimum deposit: $500
Department of Commerce Federal Credit Union
APY: 4.67%
Minimum deposit: $500
MYSB Direct
APY: 4.66%
Minimum deposit: $500
Below you can use our tool — in partnership with Bankrate — to further compare CD rates today.
Pros and cons of a CD
In some respects, CDs can act as a double-edged sword. Savers benefit from higher locked-in APYs for up to ten years, no matter what the Fed does. Conversely, the money committed to the CD is frozen until the term ends. Pulling your money early comes with heavy penalties. For that reason, it’s not a good idea to use a CD as an emergency fund.
Many banks offer high-yield savings accounts (HYSAs) with rates that change almost as quickly as the Fed does. In some cases, you’ll find HYSAs guaranteed for up to 6 months, but those are rare. CDs offer a locked-in rate that could earn consistently high interest for up to 10 years.
Similarly, if rates continue to rise after you’ve locked in, most banks don’t allow you to take advantage of the higher rate. Meaning you could lose out on additional interest earnings. Some banks offer Bump-Up CDs to combat this concern which increases your interest rate if the bank increases its rates.
For disciplined consumers, CDs can be a great way to set aside money while earning higher interest rates on their balances. However, it’s critical to have a readily accessible form of savings even if the rates aren’t as high compared to a CD.
Is a CD a good investment?
A CD can be a good FDIC-insured investment as long as you don’t need the money before the maturity date. To better illustrate the returns a CD might offer, let’s say you decided to deposit $10,000 into a 3-year CD at 4.85 percent. By the end of year three, you would have earned $1,526 on your balance.
Compared to investment options without FDIC backing, the return could be higher on the same amount of money. For example, the Vanguard 2023 Benchmark Returns report shows a 3-year average annual return of 13.72% on the S&P 500 Index as of July 31st, 2023.
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