You may earn interest on your money with minimal risk by opening a certificate of deposit (CD) account. A wide range of CD rates and conditions can be offered to depositors by different financial institutions, including internet banks, credit unions, and brick-and-mortar banks. If you want to know if CDs are a decent way to save money, it helps to know how they've worked historically and how they function.

Calculating The Interest On A Certificate of Deposit

You may earn interest on your savings by keeping them in a certificate of deposit (CD) account with a financial institution for some time. Ultimately, changes in the federal funds rate impact how banks and credit unions determine CD interest rates.

The federal funds rate measures overnight lending rates between banks. Certificate of Deposit (CD) rates, savings account rates, and money market account rates can all be indexed off the federal funds rate.

Banks can increase interest rates on loans and credit cards when the Federal Reserve hikes interest rates. They can, however, provide savers with better returns. Banks can do the same thing with deposit accounts when the Fed lowers rates.

Rates of Interest on Certificates of Deposit Over Time

As the federal funds rate shifts, CD interest rates usually follow suit. With interest rates at or over 10% for much of the first half of the 1980s, many people consider this era to be the heyday of certificates of deposit. As an illustration, six-month jumbo CD rates hit 17.74% in March 1980, which is unheard of in today's market.

Inflationary events in the early 1980s are commonly cited as a cause for the high CD rates of that era. Inflation hit 11% in June of 1979, signalling the beginning of what is often considered the greatest economic downturn in U.S. history, even worse than the Great Recession of 2007–2009.

The Federal Reserve increased interest rates due to inflation's steady ascent. When the economy becomes too hot, rate rises are implemented to cool it down. As a result of the difficulty in borrowing money at higher rates, higher rates can also control inflation.

Creditors may also increase their requirements for obtaining a loan. The general trend of falling pricing in response to decreased consumer spending is clear. These rate increases benefited savers since CD interest rates rose.

What Chance Do CD Rates Have of Rising Again?

CD interest rates in the double digits are history and likely to stay there. But, it is improbable that banks would immediately begin paying out 10%, 15%, or more in interest to CD depositors even if the Federal Reserve were to boost rates in reaction to rising inflation.

Does that imply savers shouldn't bother with CDs? Certainly not! For those still seeking a haven for their savings and the assurance of a steady, almost-guaranteed return, certificates of deposit (CDs) remain a viable choice.

A certificate of deposit (CD) may provide a higher rate of return than a savings or money market account, and it may be safer than investing in the stock market. Exactly where can you get the most competitive certificates of deposit rates?

Online banks provide depositors with better CD rates than brick-and-mortar institutions like banks and credit unions. With fewer expenses, online banks can provide competitive rates to their consumers. They can also provide lower costs than traditional financial institutions like banks and credit unions.

Why Did CD Interest Rates Skyrocket in the '80s?

Because of the Federal Reserve's efforts to curb inflation by increasing interest rates, CD rates peaked in the 1980s. Banks and other financial institutions that issue CDs boosted their payouts to depositors with the hike in the federal funds rate. The savings and loan industry's practice of offering ludicrously high CD rates to entice deposits was also crucial.

At Which Banks Do I Get the Best CD Rates?

Online banks typically provide competitive CD rates, frequently exceeding those offered by brick-and-mortar institutions like banks and credit unions. Comparisons of CD rates should include information on the minimum deposit and the time a CD must be held to receive the stated rate.

The Conclusion

The current CD rate is below its all-time high, attained during the economic turmoil of the 1980s. If you need to start saving for a new car, a trip, or any other large expense, consider opening a certificate of deposit account. CD rates can vary widely from one financial institution to another, so it pays to shop around.