Savers watch out for signs of higher CD rates in 2023
Savers could be looking at interest rates on a one-year certificate of deposit that could be as high as 5.5% in 2023, a rate that has been unimaginable for more than 15 years.
Amazingly, it isn't hard now — if you shop around a bit — to find a one-year CD with rates in the 4% to 4.5% range. And at those kind of rates, even twentysomethings wonder if they should park some of their savings on the sidelines to make a little extra cash.
After all, it wasn't all that easy to make big money in 2022, and watching the chaotic collapse of the cryptocurrency exchange FTX could make a dull CD at 4% now look pretty good.
How much money can savers earn based on higher rates?
When's the last time you heard anyone get excited about a CD? If you're in your 20s or 30s, maybe never. Who would be bragging about maybe making $12 a year in interest in recent years by setting aside $5,000 for one year or more?
But a chance to make $200 a year in interest — taking on little to zero risk — on $5,000 in savings in a CD? Now you're talking.
"CDs have been off the radar for so long," said Greg McBride, chief financial analyst for Bankrate.com, which lists rates on various products, including CDs.
Savers lost out for years as the Federal Reserve drove to push short-term rates to low levels to boost economic growth.
The Fed made two historically bold moves by pushing short-term rates as far down as 0% twice — first in December 2008 to deal with the Great Recession and then again in March 2020 to deal with the economic collapse at the start of the COVID-19 pandemic.
Interest rates had been relatively low for a good chunk of the past 20 years. Rates, for example, fell during the eight-month recession that ran from March 2001 through November 2001 and kept falling. Rates picked up a good deal in late 2005 through 2006.
Now, we're dealing with significantly higher interest rates as the Fed tries to cool down inflation.
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How much higher can the Fed raise rates?
After a string of seven rapid rate hikes in 2022, savers could benefit from higher rates in early 2023 if they shop around and lock up favorable rates on CDs.
At its December meeting, the Fed raised rates by half a percentage point — driving the federal funds rate to a targeted range that runs between 4.25% and 4.5%.
"The Fed has more rate hikes to come," McBride said.
Moody's Analytics chief economist Mark Zandi is forecasting a 0.25 percentage point hike after the Fed's two-day meeting scheduled for Jan. 31 and Feb. 1. Then, he is anticipating another 0.25 percentage point hike after the next two day meeting on March 21-22. If so, the short-term federal funds rate would end up between 4.75% to 5%.
Zandi expects that the Fed might pause at that point, reviewing whether inflation has cooled down enough so rate hikes can stop sometime in 2023. He anticipates that inflation will be close to the Fed’s target by the spring and summer of 2024.
Other analysts say the Fed even might raise rates by up to 0.75 percentage point through two or three rate hikes in 2023. Then, the short-term federal funds rate would be in a targeted range of 5% to 5.5%.
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The last time the short-term federal funds rate was at 5% was in mid-2006, and the last time it was 5.5% was in early 2001.
McBride said savers are likely to see rates on one-year CDs edge upward in early 2023, possibly hitting a 5% to 5.5% range. Savers, he said, have a few months to lock in those higher rates on one year CDs.
The average one-year CD yield is 1.36% currently, according to Bankrate.com, with the best rates being offered ending up with a yield of around 4.75%.
The average yield on CDs being issued now is nearly 10 times greater than what savers got in late 2021.
Just a year ago, savers who put money in a one-year CD were looking at average yields of 0.14% -- and the top yields that included promotional rates were just 0.67%, according to Bankrate.com data.
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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.
A week before Christmas, the sign at Genisys Credit Union branch on Main Street in Royal Oak highlighted a 13-month certificate special with a yield of 4.32%. The credit union notes online that "certificate specials are for a limited time and the credit union may end it at anytime without notice." The minimum certificate opening balance is $500.
Huntington Bank has newspaper ads for a 14-month CD with a 4.08% annual percentage yield. The minimum opening balance is $1,000.
Auburn Hills-based Cornerstone Community Financial Credit Union — which started in 1951 by serving Chrysler Corp. auto workers — ran an ad in early December that proclaimed "Move Your Money" and listed a 17-month CD with an annual percentage yield of 4.32%. But the offer does not apply to money already on deposit at the credit union. Minimum deposit: $1,000. The credit union serves residents in all of Michigan plus several counties in northwest Ohio.
East Lansing-based MSU Federal Credit Union listed a yield of 4.6% on certificates that can range in terms from 13 months to 23 months; the minimum balance is $500. The offer is valid through Dec 23, according to the credit union's website.
The MSU credit union also has a one-year add-on certificate that has an opening deposit of only $50 and offers a 4.6% APY. The add-on option can work for those who might not have much money to invest initially, said Deidre Davis, chief marketing officer for MSUFCU.
"It allows members to deposit up to an additional $10,000 over the term of the certificate, making it a great option for those who are just starting to invest," she said. "They can set up an automatic transfer on a recurring basis."
MSU Federal Credit Union also has a "jumbo" product for similar terms — with a minimum investment of $100,000 — that has an APY of 4.86%.
What's the outlook for interest rates in 2023?
Just how high savings and CD rates go in 2023, though, is questionable. Much could depend on how soon the Fed stops raising rates — and what the Fed could do if the U.S. economy goes into a recession.
"They've always rushed in to cut when the economy takes a dive," said Ken Tumin, who founded DepositAccounts in 2009, which is now part of LendingTree. The site tracks and compares bank rates.
If the Fed starts cutting rates in 2024 or possibly even in late 2023 to shore up the economy, savings rates would fall, too.
Some of the higher rates are currently being offered by online banks, credit unions and others looking to grow deposits. Rates of 4% or more on CDs aren't available everywhere now.
"Many banks are still flush with deposits that they acquired during the pandemic," Tumin said. "That surplus of deposits has started to change, but not all banks are in need of deposits."
How online banks grab deposits — and attention
More competitive CD rates offered at online banks, he said, generally follow the federal funds rate. "So if the target federal funds rate reaches a peak of 5% to 5.25%, the top one-year CD yields are likely to be in the range of 5% and 5.50%," Tumin said.
As of a Dec. 1 survey, Tumin said, the online average one-year CD had a 4.15% APY and the online average five-year CD had a 4% APY.
Citizens Access, the online division of Citizens Bank, has an online one-year CD with a 3.25% annual percentage yield currently and a 3.45% yield on a five-year CD. The minimum deposit is $5,000. The early withdrawal penalty is 90 days of interest for the 12-month CD and 180 days of interest for all other term CDs. Citizens Access also has an online savings account at 3.75%.
Ally Bank has a 12-month CD with a 4.15% yield online and an 18-month CD with a 4.25% yield as of Dec. 19. No minimum deposit is required to open.
Savers who want to lock in rates for five years, though, could need to act more quickly, as some yields on five-year CDs have pulled back lately, Tumin said.
The average five-year CD yield is 1.16% and climbs up to around 4.6% for the top yielding CDs, according to the Bankrate.com survey.
Again, that's up significantly from a year ago when the five-year CD average was 0.26% and the top yielding CDs were around 1.21%.
Rates on shorter term CDs could peak later in 2023, McBride said, so savers would have a bit more time to move.
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While the Fed will raise rates in 2023, many anticipate that it will ease up next year and could be nearing the end of its rate hike binge. At some point, the expectation is that interest rates won't keep climbing and it could be a good time to lock in a higher rate for a five-year period.
Should you cash out of an old CD early?
For some savers with old CDs, it could be worth it to even take a penalty and cash in a CD early. It's not something you'd typically consider doing. But Tumin said it can be worthwhile if you find a much higher rate of 4% or 5%.
Say you're only getting 0.25% for a CD that won't mature for another year or two. You might only lose about $3 in interest, for example, on a $5,000 CD if the annual yield is 0.25% and your penalty for early withdrawal is three months of interest. You'd have to run your own numbers and see what makes sense for you.
Tumin said that it's a pretty easy bet to make such a move if someone has an old CD rate as low as 0.25% "But even with higher rates on old CDs, it can still be a win," he said.
He has a 5-year CD that was opened a bit less than three years ago. Closing it early would result in a penalty where he'd lose five months of interest. But that CD only has a 2.15% APY and he can find a new CD with an APY of 4.25%. He's figuring he can make an extra $393 in interest on $10,000 in savings — even after a penalty — by closing out the CD and opening a new one at a much higher rate.
DepositAccounts.com has a calculator to help figure out if it is worth paying an early withdrawal penalty to break a CD.
Read the fine print
Many times, banks and credit unions are only offering those higher rates to new customers. Before you act on a promotion, find out if you'll need to withdraw money from one bank and move it to another to lock in a higher rate.
Review any terms carefully. Not all penalties for an early withdrawal are the same. The penalty is likely to be bigger if you take out a five-year CD instead of a one-year CD. And yes, brokers are offering CD rates too for bank-issued CDs. But Tumin warns that you want to make sure that the CD isn't "callable" — meaning that you'd risk the bank forcing you to redeem the CD earlier than the maturity date if interest rates fall.
Remember, rates don't always go up — and keep going up.
Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.
This article originally appeared on Detroit Free Press: Savers look for signs of higher interest rates on CDs in 2023
