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How to Invest in CDs as the Fed Keeps Raising Interest Rates


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If there’s one upside to the Federal Reserve’s aggressive interest rate hikes this year — other than their inflation-reducing potential — it’s that savings account interest rates are also rising. This includes certificates of deposit (CDs), which generally offer higher returns than regular savings accounts.

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The difference with CDs is that when interest rates rise, you have to strategize a bit more to maximize your returns. This means not only shopping around to find the best rates, but also deciding what type of CD to invest in and for how long.

The Fed has raised interest rates by a total of 3 percentage points so far in 2022, CNBC reported. This includes last week’s 0.75% rise – the third consecutive such increase. Some economists expect the Fed to raise rates by at least another percentage point by the end of the year.

One of the results is that CD yields have climbed towards 3% on various maturities after being below 1% earlier in the year. According to Next Advisor, the average annual percentage yield (APY) over a one-year CD term is currently 2.87%. For three-year terms, the average is 2.94% and for five-year terms, the average is 3.21%.

These are the highest yields in years, and for that you can thank the Fed rate hikes. The question is, should you go ahead and buy a CD now, or wait for the next Fed interest rate hike, when yields could rise further?

In an Augusta interview with Forbes, Ken Tumin, founder and editor of DepositAccounts, said the highest yields for five-year CDs could be in the 4.00% to 4.50% range. by the end of 2023, based on the expectation that the Fed would raise a total of seven times this year and three or four times next year. CD yields could even reach 5.00% in 2023 if the Fed remains aggressive and raises rates more than expected.

“If you’re worried about being locked into a low-rate CD if rates start to rise, choose long-term CDs with early withdrawal penalties of no more than six months’ interest,” Tumin said.

CDs with reduced or no withdrawal penalties allow you to move your money elsewhere with little financial hardship if returns increase in the coming months. Some banks and credit unions also offer supplemental CDs that allow you to invest a certain amount now at one interest rate, with the option to add more money at a later date at the same rate.

If you’re determined to go ahead and open a CD account now, with yields already at their highest in years, take the time to research the best rates.

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“Investors looking to get the highest possible rate on a bank CD should look beyond national averages and seek out the best rate,” said Kevin Mirabile, professor of finance and business economics at the Gabelli School. of Business from Fordham University in New York. Forbes.

Here are some of the best CD rates by term and bank this week, according to Next Advisor:

1 year

  • CFG Bank: 3.20%
  • Sallie Mae: 3.05%
  • Allied Bank: 3.00%

3 years

  • Savings on bread (formerly Comenity Direct): 3.55%
  • CFG Bank: 3.50%
  • Sallie Mae: 3.30%

5 years

  • Savings on bread (formerly Comenity Direct): 3.65%
  • CFG Bank: 3.60%
  • Synchronous Bank: 3.50%

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