CD rates tend to change depending on the state of the economy. Rates may go up during inflation, but they might drop when interest rates are low and the economy is dealing with a recession.
Understanding the certificate of deposit rate history over the past few decades—and more specifically, how rates change during times of recession, steady growth, inflation, and booms—can help you manage your expectations when shopping for a CD.
- The certificate of deposit rate history shows that rates tend to fluctuate along with ups and downs in the economy.
- The Federal Reserve often reduces interest rates during economic slowdowns and increases them during times of growth—and CD rates often follow suit.
- CD rates usually rise during times of inflation, but they hit historic lows after the Great Recession.
CD Rates During Recessions
During a recession, the economy slows down as unemployment rises and fewer people are able to buy products and services. To stimulate spending, borrowing, and investments, the Federal Reserve often lowers interest rates.
“CD rates are very correlated with the interest rate that the Federal Reserve controls,” said Doug Carey, a Chartered Financial Analyst and the owner and founder of WealthTrace, a financial planning and retirement planning software company. “Because of this, CD rates almost always decline during a recession.”
During the brief 1980 recession, for example, interest rates on three-month CDs dropped from 17.57% in March to 8.65% in July. Federal rates also decreased in the early 2000s, with CD rates falling to around 1% in 2003.
Certificate of deposit rates don’t always correlate precisely with the federal funds rate, though. During the Great Recession of 2007 to 2009 when interest rates plummeted, CD rates initially fell nearly three percentage points, but then spiked above 4% in October 2008 before sinking below 1% in late 2008 and early 2009 and remained relatively low.
CD Rates During Steady Economic Growth
While the Federal Reserve often lowers interest rates during an economic slowdown, it does not need to do so during a time of economic growth. Instead, interest rates generally remain steady or even increase.
Steady economic expansion can be beneficial to growing your money in a CD, as you might see a higher return on your investment. During economic growth in the late 1970s, for instance, three-month CD rates rose from 4.83% in January 1977 to 13.43% in December 1979. That said, CD rates haven’t topped 5% since December 2007.
Carey noted that CD rates don’t always rise during times of economic growth. He pointed to the more than 10 years after the Great Recession as proof.
“The Federal Reserve has kept short-term rates at historic lows even as the economy recovered [from the Great Recession],” Carey said.
CD Rates During Inflation
Although consumers enjoyed high CD rates during a period known as the “Great Inflation” (1965-1982), these returns weren’t worth as much as you might think due to inflation. The three-month CD rate in 1980 reached 18.65%, but the inflation rate hit 14.6%, year on year, in March and April.
“Inflation was deemed out of control at that point and investors demanded a very large interest rate to compensate them,” Carey said.
While CD rates tend to increase during times of inflation, these higher rates don’t necessarily translate to more spending power. If your CD rate doesn’t exceed the inflation rate, you could actually see your investment depreciate in value over time.
CD Rates During Economic Booms
During a boom, the economy is experiencing rapid growth and a rise in demand for goods and services. Interest rates and CD rates tend to increase, as well.
“Generally, we see higher CD rates during boom times than during times of slower growth,” Carey said. “In fact, the Federal Reserve often increases short-term interest rates during times of strong economic growth, which then propels CD rates higher.”
As the U.S. gross domestic product (GDP) rose between 2016 and 2018, for example, CD rates also increased from around 0.57% to 2.69%.
Of course, economic booms don’t last forever. When demand stabilizes and economic growth slows down, CD rates could go down, as well.
Frequently Asked Questions (FAQs)
What is the highest CD rate in history?
According to data from the Federal Reserve Bank of St. Louis, CD rates reached an all-time high in 1980—18.65% for three-month CDs and 18.29% for six-month CDs. Between May 18, 2009, and March 29, 2021, the highest one-year CD rate was 1.29% and the highest five-year CD rate for accounts with less than $100,000 was 2.30%.
Are CD rates going up anytime soon?
CD rates typically increase during times of high inflation, and the U.S. inflation rate reached 8.5% in 2022. However, CD rates remained low, with the average three-month and five-year national deposit rates on CDs ranging between 0.06% and 0.32%, respectively.
If high inflation continues, however, Carey expects CD rates to go up.
“If we continue to see historically high inflation, that is when we [may] see CD rates increase by a large amount,” he said. “It might take another few months for this to occur though.”
Despite relatively low rates in 2022, CDs may be beneficial for some consumers. Along with locking in a fixed rate for a set period of time, your money (including balances you have in other deposit accounts at the same bank or credit union) is insured for up to $250,000 by the FDIC, as long as you opened the account with an FDIC-insured bank. If you want a safe place to stash your savings, a CD could make sense even though yields are a fraction of what they were in the 1980s.
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