What Is the Highest CD Rate in History?

A Certificate of Deposit (CD) is a type of savings account that holds a fixed amount of money for a fixed period. In return for keeping the funds deposited for a set term, the issuing bank pays interest. This financial instrument allows individuals to save money with a guaranteed interest rate, providing a predictable return on their investment. Understanding the historical context of CD rates, particularly their highest points, offers insight into how economic conditions can influence investment opportunities.

The Peak CD Rate Era and Specific Highs

CD rates reached their peak primarily during the late 1970s and early 1980s. This period saw rates climb into double-digit figures. For instance, in early May 1981, three-month CDs paid an average annual percentage yield (APY) of approximately 18.3%.

In December 1980, six-month CD rates averaged 17.74% APY, rising to 17.98% in August 1981. The average three-month CD rate also hit 18.65% around this time. These high rates were not sustained for long, but they represent an anomalous period in the history of deposit accounts.

CD rates oscillated between 5% and 11% APY for most of the 1970s. By 1981, they topped above 15% APY, remaining above 9% until 1984. While these rates were beneficial for savers, the economic environment of the time meant that the real return on these investments, after accounting for inflation, was often less impressive.

Key Economic Factors Driving Historical Highs

The high CD rates of the late 1970s and early 1980s were a direct consequence of severe economic challenges, primarily high inflation. Inflation had been steadily increasing since the mid-1960s, reaching over 14% in 1980. This “Great Inflation” eroded the purchasing power of money, prompting the Federal Reserve to take action.

To combat inflation, the Federal Reserve, under Chairman Paul Volcker, implemented interest rate hikes starting in late 1979. The federal funds rate, which influences other interest rates, was pushed to a peak of 20% in June 1981. This tight monetary policy was designed to slow the economy and bring inflation under control, even at the risk of a recession.

Banks responded to these elevated benchmark rates by offering higher interest rates on deposits like CDs to attract and retain funds. The high rates were necessary for banks to remain competitive as inflation was eroding the value of money. This period saw two recessions, high unemployment, and double-digit inflation, which made the high CD yields a response to a challenging economic landscape rather than a sign of prosperity.