CD rates are about to come back. Now if only inflation would calm down | Finance

PATRICIA SABATINI Pittsburgh Post-Gazette

Tracking CD rates in recent years has been a bit like watching paint dry at the bottom of a barrel: little discernible change in the lower yields.

Certificate of deposit yields have been in the tank for years, especially since the start of the pandemic. But things are about to change.

“The next 12 to 24 months will be a period of rising interest rates, which means improving CD yields,” said Greg McBride, chief financial analyst at

“It won’t be great, but at least things are now moving in the right direction, which is more than we’ve seen” in years, he said.

On the other hand, inflation has warmed up – the worst in 40 years – which is rapidly swallowing up any returns on deposits.

“Interest rates have to rise significantly and inflation has to come down significantly before they become a winning combination for savers,” McBride said.

Earlier this month, the Federal Reserve stepped up its fight against inflation by raising its benchmark interest rate by half a percentage point to a range of 0.75% to 1%. This is the highest level since the outbreak of COVID-19 about two years ago.

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Further increases are likely on the way.

The Fed is expected to approve a similar half-point hike in June and July, said Gus Faucher, chief economist at Pittsburgh-based PNC Financial Services Group.

“The rate will end this year above 2% and end next year around 3%,” he said, which will increase short-term borrowing costs, including interest rates. credit card interest, short-term auto loans and home equity lines of credit.

“The Fed’s hope is that higher rates will help cool economic growth and allow inflation to slow, without pushing the economy into recession,” Faucher said.

Long-term rates such as mortgage rates have already climbed in recent months as the Fed signaled its intention to stop buying the longer-term Treasuries and mortgage-backed securities it had bought for help the economy.

The average 30-year mortgage rate – which fell to an all-time low below 3% in 2020 – has risen more than two percentage points since late December, from 3.27% to 5.38%. This is the highest since 2009.

Faucher expects the average 30-year mortgage to end the year between 5.5% and 6%.

For CDs, rates have also started to climb.

Annual yields on one-year certificates are averaging 0.15% nationally, down from 0.13% a year ago, according to Five-year certificate yields average 0.39%, down from 0.32% a year earlier.

But depositors willing to shop across the country can get much better returns. People shouldn’t be afraid to do business with out-of-town financial institutions as long as those institutions are federally insured, McBride said.

Many big banks are already sitting on mountains of deposits, so they don’t need to be competitive with their CD rates, McBride said.

“A lot of banks are going to be stingy,” he said. They have a lot of money to lend, so they don’t need to entice depositors with tempting above-market rates.

“It’s like running a business and having a warehouse full of inventory. You’re not going to bring in three more trucks,” he said.

“As a saver, you want to look for banks that are willing to provide deposits” and pay more interest to get them, he said.

The best-performing six-month CDs were paying around 1% last week, according to The best rates on one-year certificates are around 1.3% and on five-year CDs around 2-2.25%.

McBride expects the top-performing 1-year CDs nationally to hit around 2.25% by the end of the year, with 5-year CDs hitting around 3.25%.

Jack L. Goldstein