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So far in 2024, thanks to 11 interest rate hikes by the Federal Reserve over the past few years and inflation rates remaining steady at just above 3%, certificates of deposit (CDs) have proven to be a worthwhile savings account to add to your savings strategy.
These factors have pushed CD interest rates to highs not seen in 40 years. “The Federal Reserve has raised interest rates at the fastest pace in 40 years as part of its efforts to combat inflation, and savers are enjoying the highest yields on savings accounts and CDs in more than a decade,” says Greg McBride, CFA, chief financial analyst at Bankrate. “Although the Fed has ended its rate hikes, savers should be able to enjoy competitive yields for some time, as they are likely to keep rates elevated for a period of time to ensure inflation falls to 2%,” McBride adds.
Nearly 40 years ago, certificates of deposit (CDs) were considered a good investment, with the average annual percentage yield (APY) for a one-year CD exceeding 11 percent.
However, since 2009, in the aftermath of the Great Recession, average interest rates on short-term CDs have fallen below 1% annually. Then, in the wake of the COVID-19 pandemic, yields on all CD terms, including the 5-year CD, plummeted below 1% annually. However, over the past year, CD rates have begun to rise again as federal interest rate hikes have begun.
Currently, the average yield on a one-year CD is 1.77 percent, up from 1.53 percent a year ago, and the most competitive banks are offering APYs of over 5 percent on one-year CDs.
Here we explain the historical fluctuations in CD interest rates and provide some context for interest rate fluctuations over the decades.
CD interest rates in the 1980s
CD yields peaked when the U.S. faced two recessions in the early 1980s: the average annual interest rate on a three-month CD was about 18.3% in early May 1981, according to data from the Federal Reserve Bank of St. Louis.
Interest rates were high in the 1980s because inflation was high. Inflation increases the cost of goods and services and reduces what your money can buy. So savers enjoyed rising interest rates on their CDs, but their purchasing power decreased.
“Interest rates rose significantly in the early 1980s as the Federal Reserve under Paul Volcker used high interest rates to tame double-digit inflation,” McBride says.
CD interest rates in the 1990s
After another brief recession in the early 1990s, conditions improved and inflation fell. Overall, the decade was characterized by a robust economy.
“CD yields fell in the early 1990s following the economic downturn and the Fed’s efforts to control inflation a decade earlier,” McBride says. “Yields stabilized in the late ’90s due to a sustained economic expansion.”
By June 1993, interest rates had begun to normalize again, with the average yield on a one-year CD falling to 3.1% annually, according to Bankrate research data.
CD interest rates in the 2000s
In early 2000, as the dot-com boom began to lose steam, the economy began to slow and the Fed cut interest rates to stimulate the economy.
The average yield on a one-year CD fell below 2% in 2002, according to Bankrate data.
After the global financial crisis in September 2009, the average interest rate on a one-year CD was less than 1 percent annually. The average interest rate on a five-year CD was slightly higher, at about 2.2 percent annually.
Other interest rates also fell as central banks cut their benchmark rates.
“The decade was sandwiched between recessions, both of which led to record low interest rates at the time,” McBride says. “In between was a housing boom, the Fed hiked interest rates 17 times, and a camelback trend in CD yields.”
CD interest rates from 2010 to 2020
After the Great Recession of 2007-2009, the Federal Reserve’s stimulus measures left many banks flush with cash and no longer needed to raise CD rates to fund loans.
CD yields have hit record lows: According to data from Bankrate, the average yields on one-year and five-year CDs in June 2013 were 0.24% annual interest rate and 0.77% annual interest rate, respectively.
“CD yields continued to decline in the years following the Great Recession as the Federal Reserve kept benchmark interest rates near zero amid a sluggish economic recovery,” McBride says.
As the Fed gradually raised its benchmark interest rate between December 2015 and 2018, savers began to benefit.
“The Fed raised interest rates nine times between 2015 and 2018, then reversed course in late 2019 to try to sustain what was then a record economic expansion,” McBride said.
Then, in early 2020, the COVID-19 pandemic hit, causing a global economic shock.
“When COVID-19 devastated the global economy, the Fed quickly slashed its benchmark interest rate to near zero to help fuel the recovery,” McBride explains.
CD Interest Rates for 2020 and Beyond
In March 2020, the Fed implemented several emergency interest rate cuts as a result of the economic shutdown caused by the COVID-19 pandemic.
Here’s how CD rates fell in the year following the 2020 emergency rate cuts:
- From June 2020 to June 2021, the average yield on a one-year CD fell from 0.41% APY to 0.17% APY.
- From June 2020 to June 2021, the average yield on a five-year CD fell from 0.6% annual interest rate to 0.31% annual interest rate.
“When interest rates were cut to near zero during the early stages of the pandemic, CD yields hit record lows,” McBride says.
However, average CD rates have skyrocketed in the years since. In June 2021, the average APY for a one-year CD was 0.18%, and the average APY for a five-year CD was 0.39%. In September 2023, the average APY for a one-year CD was 1.78%, and the average APY for a five-year CD was 1.44%.
That’s mainly because the Fed is set to raise interest rates 11 times in 2022 and 2023, encouraging banks to raise fees on loans and pay more for savings products, including CDs. (The federal funds rate has an indirect effect on CDs.)
According to Bankrate’s interest rate survey data as of September 24, 2024,
- The national average one-year CD yield was 1.77% annually, down from an average yield of 1.53% about a year ago.
- The national average five-year CD yield was 1.43% annually, up from 1.34% nearly a year ago.
CD rates have fallen from their current cycle peak in October 2023. But CDs and savings accounts are still outpacing inflation.
“Although interest rates are retreating from the high levels of the past few years, all is not lost for savers,” McBride says. “Even as rates fall, the highest-yield savings accounts and term deposits should continue to pay above-inflation yields for the foreseeable future.”
By comparing top-tier CD options to find the best interest rate for the term that fits their needs, savers can get closer to bridging the gap between inflated costs and savings yields.
Conclusion
Despite fluctuations in interest rates over the years, CDs have once again proven to be a worthwhile investment in 2024. Although the Federal Reserve raised interest rates to a 23-year high in September 2024 before lowering them by 50 basis points, the APYs on competitive CDs remain well above the current rate of inflation. To make the most of high APYs, it’s important for savers to compare the top CD options to find the best interest rate that fits their needs.
*In June 2023, Bankrate updated the methodology for determining the national average CD interest rate; however, the data in the charts in this article is based on historical data from Bankrate’s previous methodology.
Bankrate Matthew Goldberg Former Bankrate reporter Libby Wells contributed to an earlier version of this story.
