Are CD Rates Going to Rise? What Savers Should Know

A Certificate of Deposit (CD) is a type of savings account where a fixed sum of money is held for a predetermined period. This investment vehicle allows individuals to earn a fixed interest rate in exchange for keeping their funds untouched until a specified maturity date. CDs are generally regarded as a low-risk option, offering predictability in returns compared to more volatile investments. They provide a secure way to grow savings without exposure to market fluctuations.

Factors Influencing CD Rates

Several interconnected economic forces shape the interest rates offered on Certificates of Deposit. Understanding these factors provides insight into how CD rates move. These influences range from central bank actions to broader economic conditions and even competition among financial institutions.

The Federal Reserve’s monetary policy significantly impacts CD rates. The Federal Open Market Committee (FOMC) sets a target range for the federal funds rate, which is the interest rate banks charge each other for overnight borrowing of reserves. Changes to this rate directly influence borrowing costs for banks, which in turn affects the rates they offer on deposit products like CDs. When the Fed raises the federal funds rate, banks typically increase their deposit rates to attract the necessary funds to meet their lending demands. Conversely, a reduction in the federal funds rate usually leads to lower CD rates as banks’ borrowing costs decrease.

Inflation also plays a substantial role in determining CD rates. Inflation refers to the general increase in prices for goods and services over time, which erodes the purchasing power of money. Banks and investors consider inflation to ensure that the real return on a CD—the return after accounting for inflation—remains positive. If inflation is expected to rise, banks may offer higher CD rates to compensate depositors for the anticipated loss of purchasing power, ensuring the investment remains attractive. This adjustment helps maintain the value of the principal and earned interest in real terms.

Broader economic growth and the overall economic outlook also influence CD rates. A robust economy, characterized by strong Gross Domestic Product (GDP) growth and low unemployment, often leads to increased demand for loans from businesses and consumers. To fund this increased lending, banks need to attract more deposits, prompting them to offer higher CD rates. Conversely, during periods of economic stagnation or recession, loan demand typically diminishes, reducing banks’ need for deposits and leading to lower CD rates. Economic indicators like employment data and consumer spending provide signals about the economy’s health and future direction.

Yields in the bond market, particularly U.S. Treasury bonds, serve as benchmarks for many other interest rates, including those for CDs. Treasury securities are considered virtually risk-free, and their yields reflect the cost of government borrowing. Banks must offer competitive rates on CDs to attract investor funds, especially when compared to the returns available from government bonds. If Treasury yields increase, banks often raise their CD rates to remain competitive and prevent investors from choosing government securities over bank deposits. This competition ensures that CDs remain an appealing option for savers seeking a fixed return.

Finally, competition among individual banks and credit unions also influences the rates offered on Certificates of Deposit. Financial institutions adjust their CD rates based on their specific funding needs, current liquidity levels, and the competitive landscape. Banks that need to attract more deposits to support lending activities or meet regulatory requirements may offer more attractive CD rates than their competitors. This competitive dynamic ensures that banks continually evaluate and adjust their offerings to attract and retain depositors, providing varied options for consumers.

Current Economic Climate and Rate Outlook

The present economic environment provides a complex backdrop for the trajectory of Certificate of Deposit rates. Recent actions and forward guidance from the Federal Reserve are central to understanding the current rate landscape. The Fed has implemented a series of interest rate adjustments over the past several years to manage inflation, moving from a period of near-zero rates to sustained increases.

The Federal Reserve’s current monetary policy statements indicate a cautious approach, balancing efforts to bring inflation down to its target level while aiming to avoid a significant economic downturn. As of July 2025, the Federal Open Market Committee (FOMC) maintained its target federal funds rate in a range of 4.25% to 4.50% for the fifth consecutive meeting. This stance suggests that future decisions will remain data-dependent, meaning any further adjustments to the federal funds rate will be carefully considered based on incoming economic data. Banks typically adjust their CD offerings in anticipation of or in response to these policy changes, with a general expectation among analysts for gradual rate decreases over the next few years.

Inflationary trends remain a significant consideration for the Fed and, consequently, for CD rates. The US annual inflation rate, as measured by the Consumer Price Index (CPI), was 2.7% in July 2025, showing no change from the previous month. Core inflation, which excludes volatile food and energy prices, stood at 3.1% in July. While inflation has moderated from its peaks, its continued presence above the Federal Reserve’s 2% target could prompt the Fed to maintain higher interest rates for longer, thereby influencing CD rates.

Economic performance indicators also shape the broader interest rate environment. Real Gross Domestic Product (GDP) increased at an annual rate of 3.0% in the second quarter of 2025, following a 0.5% decrease in the first quarter. The US economy expanded by 2% in the second quarter of 2025 compared to the same period in the previous year. The labor market remains relatively stable, with the US unemployment rate at 4.2% in July 2025, fluctuating little from June’s 4.1% and remaining within a narrow range since May 2024. A resilient economy may reduce the urgency for the Fed to cut rates rapidly, potentially supporting current CD rate levels.

Financial economists and analysts offer varied forecasts for CD rates in the short to medium term. The Federal Reserve’s own median forecast suggests the federal funds rate could be around 3.9% by the end of 2025, implying potential for additional small rate cuts. Some projections anticipate the federal funds rate settling between 2.25% and 3.1% by mid-2027. For CD rates specifically, Bankrate forecasts national average 1-year CD annual percentage yields (APYs) to be around 1.25% and 5-year CD APYs at 1.35% by the end of 2025, with top-yielding CDs potentially reaching 3.70% for 1-year terms and 3.95% for 5-year terms. While CD rates have generally seen slow declines or remained steady in 2025, short-term CDs have often offered more competitive rates than long-term options due to market uncertainty.

CD Investment Approaches in Dynamic Rate Environments

Navigating a changing interest rate environment requires understanding various Certificate of Deposit structures. Each type offers distinct features that can be advantageous depending on whether rates are expected to rise, fall, or remain stable. Investors can select options that align with their liquidity needs and rate expectations.

One fundamental decision involves choosing between short-term and long-term CDs. Typically, longer-term CDs, such as those with five-year maturities, offer higher interest rates than shorter-term options like six-month CDs. This higher rate compensates investors for locking up their funds for an extended period. When interest rates are expected to rise, short-term CDs offer greater flexibility, allowing investors to reinvest their funds at potentially higher rates sooner. Conversely, if rates are anticipated to fall, locking in a higher rate with a long-term CD can provide predictable returns over an extended period.

CD laddering is a strategy that involves investing in multiple CDs with staggered maturity dates. For example, an investor might purchase CDs maturing in one, two, three, four, and five years. As each short-term CD matures, the funds can be reinvested into a new longer-term CD, such as a new five-year CD. This approach provides regular access to a portion of the invested capital as CDs mature annually, while also allowing the investor to benefit from potentially rising interest rates as new CDs are purchased at prevailing higher rates. It helps balance liquidity needs with the desire to capture higher long-term rates.

Bump-up CDs provide a unique feature designed for environments where interest rates might increase. These CDs allow the investor a one-time, or limited, option to request an interest rate increase if the bank offers a higher rate on the same CD product during the CD’s term. This means that if market rates rise significantly after the CD is opened, the investor can “bump up” their CD’s rate to the new, higher offering. This feature offers flexibility, potentially allowing the investor to benefit from rising rates without incurring early withdrawal penalties.

Callable CDs represent another type of CD with specific characteristics. With a callable CD, the issuing bank has the option to “call” or redeem the CD before its stated maturity date. This feature is typically exercised by the bank if interest rates fall significantly after the CD is issued, allowing the bank to refinance its deposits at a lower cost. While callable CDs often offer a slightly higher interest rate than non-callable CDs to compensate for this embedded risk, they introduce the possibility that the investor’s funds could be returned earlier than expected, potentially requiring reinvestment at lower prevailing rates.