Fed Rate Pause Stabilizes CD Rates at 4.60% APY

In the wake of the Federal Reserve's three interest rate reductions in 2024, CD rates experienced a swift decline. However, as the Fed has temporarily halted further rate changes in 2025, CD rates have stabilized. Currently, the most attractive CD rates offer up to 4.60% APY. Investors have the opportunity to secure these high rates for an extended period by funding a certificate now. With market anticipation of additional Fed rate cuts this year, any delays could result in missing out on these favorable rates.

Northern Bank Direct is offering the highest CD rate of 4.60% on its six-month CD. This rate is part of a broader trend where CD rates are elevated across both short-term and long-term options. While annual percentage yields are a crucial factor, they are not the sole consideration when selecting a financial institution for a CD. Being informed about the highest available rates can guide investors in making well-informed decisions.

Established banks like Chase, PNC, and U.S. Bank often prioritize attracting customers through more lucrative products such as loans and credit cards, rather than CDs. Consequently, the CD interest rates offered by these banks are often lower compared to those available at smaller regional banks or online institutions. Securing a competitive rate at these larger banks may necessitate opening additional deposit accounts or meeting higher minimum deposit requirements.

CD rates are closely tied to Federal Reserve monetary policy decisions. When the fed funds rate rises or falls, CD rates follow suit. It is crucial for CD investors to stay attuned to shifts in central bank policy to effectively plan for potential rate adjustments. At the Federal Open Market Committee’s (FOMC) first policy meeting of 2025, held January 28-29, the Fed left interest rates unchanged, as expected. This means CD rates will remain stable for the time being. The most recent FOMC meeting happened on June 17-18 with no changes to the fed funds rate—and the next scheduled meeting is July 29-30.

In 2024, the Fed cut rates three times, leaving the federal funds rate in a range of 4.25%-4.50% as of December. The central bank reduced rates as inflation began receding following a pandemic-related spike. The rate cuts sought to support the U.S. economy with cheaper loans, and that took CD rates down from highs seen in the years prior. The very rich CD yields in 2022 and 2023 were driven by a two-year-long series of Fed rate hikes. From March 2022 to July 2023, the FOMC raised the federal funds rate 11 times, taking it from zero all the way up to 5.25%-5.50%. The central bank was acting to control inflation that hit highs not seen since the 1980s, driven by the significant economic disruptions of the COVID-19 pandemic.

While current CD rates are softer now, they’re still not far off their recent highs. Investors still have plenty of opportunities to secure advantageous rates on both short-term and long-term CDs. By investing a larger lump sum into your CD account, you can benefit from substantial interest accumulation.

In the early 1980s, CD rates surged into double digits, in sharp contrast with today's lower rates. By 2019, however, the APY for a 5-year CD had surpassed 3%. In recent years, we experienced a period of increasing rates, with the best offerings surpassing 5% APY for 1-year CDs in 2024. These APYs are now beginning to stabilize, and we no longer see many rates above this threshold in 2025.

Determining what constitutes a "good" CD rate involves finding a balance between securing the highest available rate and your willingness to keep funds locked away for a specific duration. For instance, choosing a 5% APY CD over five years might not be ideal if you expect to need access to your funds sooner or if interest rates increase, potentially lowering your overall returns. Generally, rates that exceed the national average are considered advantageous. It's crucial to compare rates across different banks to find the best option tailored to your specific financial goals. Key factors to consider when comparing CDs include term length, APY, minimum deposit, penalties, and deposit insurance.

Online banks and fintech companies often offer more competitive rates compared to national banks. Large financial institutions primarily derive revenue from interest on loans, fees, and investments in securities. Meanwhile, smaller banks and online fintech companies attract customers by providing competitive APYs on deposit accounts. Furthermore, online banks typically operate with lower overhead costs, allowing them to pass on better rates to their clients.

CD ladders appeal to savers who prefer flexibility without committing funds for extended periods. By diversifying savings across CDs with different maturity dates, you can balance short-term accessibility with higher long-term interest rates. For instance, begin by investing in three staggered CDs (1-year, 2-year, and 3-year terms). As each CD matures, reinvest the funds into a new 3-year CD. This approach allows annual access to your funds while benefiting from accrued higher interest from the longer term lengths.

There are various types of CDs designed to meet different financial needs. Brokered CDs are purchased and sold through brokerage accounts rather than directly from banks or credit unions. They often offer higher APYs because they are issued by banks and then sold to brokerages. Callable CDs include a feature that allows the issuing institution to terminate the CD before its maturity date. Investors receive their principal and any accrued interest up to the call date if this option is exercised. Bump-up CDs allow you to request a higher APY if interest rates increase after opening the account. Typically, you can adjust the rate once or twice during the CD's term. No-penalty CDs do not charge penalties for early withdrawals before maturity. This type is less common and may offer lower APYs compared to traditional CDs. Jumbo CDs require a substantial minimum deposit, often starting at $100,000 or more. They generally offer higher APYs than standard CDs. Variable-rate CDs have an APY that changes in response to prevailing interest rates. These CDs carry more risk than traditional CDs because a decrease in interest rates before maturity can result in a lower yield.