Certificates of deposit (CDs) are often seen as one of the safest places to park your money. But many savers wonder whether CD rates will increase and whether CDs are still worth using in today’s financial environment.
To understand where CD rates might be headed, it helps to look at how they’ve changed over time, what affects them, and why CDs can still play an important role in your savings strategy.
CD Rates Used to Be Much Higher – But There’s a Catch
If you look back several decades, CD rates were dramatically higher than they are today. For example, in the mid-1980s, a five-year CD could earn over 12% interest. That sounds amazing compared to today’s rates, which often fall around 3% or less.
But there’s an important detail: inflation was also extremely high during that period.
Inflation reduces your money’s purchasing power. So even though CDs paid more interest back then, everyday expenses like housing, food, and transportation were rising quickly too. As a result, savers weren’t necessarily gaining as much financial advantage as those high rates suggest.
Over time, as inflation and overall interest rates declined, CD rates dropped as well.
What Determines CD Rates?
CD rates don’t move randomly. They’re closely tied to broader economic factors, especially:
1. Federal Reserve Interest Rates
Banks base their CD rates largely on the federal funds rate, which is influenced by the Federal Reserve. When the Fed raises rates, CD rates typically rise. When the Fed lowers rates, CD rates usually fall.
2. Inflation
Higher inflation often leads to higher CD rates. Banks increase rates to stay competitive and attract deposits. However, even when rates rise, inflation can offset your real gains.
3. Bank Competition
Banks adjust CD rates based on market competition. If banks need more deposits, they may offer higher CD rates to attract customers.
Could CD Rates Go Up Again?
Yes, CD rates can increase especially during periods of rising inflation and higher central bank interest rates.
However, higher CD rates usually reflect broader economic pressures. In other words, while you might earn more interest, your overall cost of living could also rise.
This means the goal isn’t just chasing the highest CD rate it’s choosing the right balance of safety, income, and growth for your financial situation.
Why CDs Are Still a Smart Option for Many Savers
Even when rates are relatively low, CDs offer several important advantages.
1. CDs Are Extremely Safe
Unlike stocks, CDs don’t lose value due to market fluctuations.
If you deposit money into a CD at a bank insured by the Federal Deposit Insurance Corporation (FDIC), your funds are protected up to $250,000 per depositor, per bank.
For example:
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If you deposit $100,000 in a CD, your full amount is protected.
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Even if the bank fails, the federal government ensures you get your money back.
This makes CDs one of the safest financial products available.
2. CDs Provide Predictable Income
With a CD, you know exactly how much interest you’ll earn.
For example:
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Deposit: $50,000
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CD rate: 3% annually
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Interest earned per year: $1,500
There are no surprises. This predictable income can be especially helpful for retirees or anyone who wants stable returns.
3. CDs Offer Peace of Mind During Market Uncertainty
Stock markets can rise and fall dramatically. During major downturns such as financial crises or economic shocks investments can lose value quickly.
CDs, on the other hand, remain stable. Your principal and interest are guaranteed.
This stability can reduce stress, especially if you depend on your savings for important goals like retirement or emergency funds.
4. CDs Help Diversify Your Savings
Putting all your money in one place can be risky.
A balanced approach might include:
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Stocks for growth
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Bonds for income
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CDs for safety and stability
For example, someone saving for retirement might put:
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70% in investments for growth
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30% in CDs for safety
This way, part of their money remains secure no matter what happens in the market.
5. CDs Usually Earn More Than Regular Savings Accounts
While CDs don’t typically outperform stocks long term, they often offer higher interest rates than standard savings or money market accounts.
In many cases, CD rates can be several times higher than regular savings account rates.
That makes them a good choice for money you don’t need immediate access to.
One Important Drawback: Inflation Can Reduce Your Real Returns
Even though CDs protect your principal, inflation can slowly reduce your purchasing power.
For example:
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CD interest rate: 3%
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Inflation rate: 4%
Your money is technically growing but its real value is decreasing.
This is why CDs work best as part of a broader financial strategy, not your only investment.
Should You Put Money Into CDs Now?
CDs are a strong option if you:
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Want a safe place to store money
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Prefer predictable returns
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Are saving for medium-term goals (1–5 years)
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Want to reduce risk in your overall portfolio
They’re especially useful for:
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Emergency funds beyond your immediate cash needs
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Retirement income stability
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Protecting part of your savings from market volatility
Smart Strategy: Use a CD Ladder
Many experienced savers use a technique called a CD ladder.
For example:
Instead of putting $10,000 into one 5-year CD, you split it:
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$2,000 in a 1-year CD
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$2,000 in a 2-year CD
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$2,000 in a 3-year CD
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$2,000 in a 4-year CD
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$2,000 in a 5-year CD
Each year, one CD matures. You can then reinvest at current rates.
This gives you:
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Regular access to your money
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Flexibility if rates rise
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Continuous passive income
Please take a look at this as well:
CD vs. Savings Account: Which One Should You Choose?
