Savers may be looking at interest rates on a one-year Certificate of Deposit that could reach 5.5% in 2023, a rate unimaginable for more than 15 years.
Amazingly, it’s not hard now – if you shop around a bit – to find a year’s CD with rates from 4% to 4.5%. With this kind of price, even young people in their twenties wonder if they should put some of their savings on the sidelines to earn a little extra cash.
After all, making big profits in 2022 wasn’t easy, and watching the chaotic crash of cryptocurrency exchange FTX can make a lackluster 4% CD now look pretty good.
How much money can savers earn based on higher rates?
When was the last time you heard anyone get excited about a CD? If you’re in your 20s or 30s, you probably never do. Who brags about making $12 a year in interest in recent years by setting aside $5,000 for one year or more?
But is there a chance of earning $200 in interest–with little to zero risk–on $5,000 worth of savings in a CD? You are now speaking.
“CDs have been under the radar for a long time,” said Greg McBride, chief financial analyst at Bankrate.com, which lists prices for various products, including CDs.
Savers have been losing for years as the Federal Reserve pushes short-term interest rates to low levels to boost economic growth.
The Fed made two historically bold moves by pushing short-term interest rates as high as 0% twice – first in December 2008 to deal with the Great Recession and then again in March 2020 to deal with the economic meltdown at the start of the COVID-19 pandemic.
Interest rates have been relatively low for a good part of the last 20 years. For example, prices fell during the eight-month recession that lasted from March 2001 through November 2001 and have continued to fall. Prices picked up a good deal in late 2005 through 2006.
Right now, we are dealing with much higher interest rates as the Fed tries to calm inflation.
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How far can the Federal Reserve raise interest rates?
After a series of seven rapid rate increases in 2022, savers can take advantage of higher rates in early 2023 if they shop around and book decent rates on CDs.
At its December meeting, the Fed raised interest rates by half a percentage point – pushing the federal funds rate to a target range of 4.25% to 4.5%.
“The Fed has more rate hikes ahead,” McBride said.
Mark Zandi, chief economist at Moody’s Analytics, expects a rise of 0.25 percentage point after the two-day Federal Reserve meeting scheduled for January 31 and February 1. 22. If that were the case, the short-term federal funds rate would expire between 4.75% to 5%.
Zandi predicts that the Fed may pause at this point, to review whether inflation has subsided enough that rate hikes could stall sometime in 2023. He expects inflation to be close to the Fed’s target by the spring and summer of 2024. .
Other analysts say the Fed could raise interest rates by as much as 0.75 percentage point by raising interest rates two or three times in 2023. After that, the short-term federal funds rate will be in a target range of 5% to 5.5%.
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The last time the short-term federal funds rate was at 5% was in mid-2006, and the last time it was 5.5% was in early 2001.
McBride said savers are likely to see interest rates on one-year CDs trend upward in early 2023, likely into a range of 5% to 5.5%. He said savers have a few months to lock in those higher rates on CDs for one year.
The average one-year bond yield is currently 1.36%, according to Bankrate.com, with the best rates offered ending up with a yield of around 4.75%.
The average return on CDs being released now is nearly 10 times what savers earned in late 2021.
Just a year ago, savers who put money into a CD for one year were looking for average returns of 0.14% — the highest returns that included promotional rates were just 0.67%, according to Bankrate.com data.
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What are some CD deals out there right now?
Now it is not uncommon to drive around the city and see CDs advertised on a window or electronic sign in a branch.
A week before Christmas, the sign at the Genisys Credit Union branch on Main Street in Royal Oak featured a special certificate for 13 months with a yield of 4.32%. The Credit Union Online notes that “certificate special offers are for a limited time and the credit union may terminate it at any time without notice.” The minimum amount to unlock the certificate is $500.
Huntington Bank has press ads for a 14-month CD with an annualized yield of 4.08%. The minimum amount to open an account is $1,000.
The Auburn Hills-based Cornerstone Community Financial Credit Union — which began in 1951 by servicing auto workers at Chrysler Corp. — ran an ad in early December announcing “Move Your Money” and listed a 17-month CD with an APR of 4.32%. But the offer does not apply to money already deposited in the credit union. Minimum deposit: 1,000 USD. The credit union serves residents throughout Michigan as well as many counties in northwest Ohio.
East Lansing-based MSU Federal Credit Union has listed a yield of 4.6% on certificates that can range from 13 months to 23 months; The minimum balance is $500. The offer is valid through December 23, according to the credit union website.
MSU Credit Union also has an additional one-year certificate that has an opening deposit of just $50 and offers 4.6% APY. The add-on option could work for those who may not have a lot of money to invest initially, said Deidre Davis, MSUFCU’s chief marketing officer.
“It allows members to deposit up to an additional $10,000 over the life of the certificate, making it a great option for those who are just starting out with investing,” she said. “They can set up an automatic conversion on a recurring basis.”
MSU Federal Credit Union also has a “Jumbo” product for similar terms — with a minimum investment of $100,000 — that has an APY of 4.86%.
What are the expectations for interest rates in 2023?
However, how high savings rates and CDs will be in 2023 is questionable. Much may depend on how soon the Federal Reserve stops raising interest rates – and what the Fed can do if the US economy enters a recession.
“They always rush to cut back when the economy is down,” said Ken Tomin, who founded DepositAccounts in 2009 and is now part of LendingTree. The site tracks and compares bank rates.
If the Fed starts cutting interest rates in 2024 or perhaps even in late 2023 to support the economy, savings rates will fall, too.
Some of the higher rates are currently being offered by online banks, credit unions and others looking to increase deposits. Rates of 4% or more on CDs are not available everywhere now.
“Many banks are still full of the deposits they took out during the pandemic,” Tommen said. “This excess of deposits is starting to change, but not all banks need deposits.”
How do online banks attract deposits – and attention
He said the most competitive CD rates offered at online banks generally follow the federal funds rate. “So if the target federal funds rate peaks from 5% to 5.25%, the one-year bond yield will likely be in the 5% to 5.50% range,” Tommen said.
Tommen said that as of a December 1st survey, the average one-year online CD had 4.15% APY and the average five-year online CD had 4% APY.
Citizens Access, the online division of Citizens Bank, has an online one-year CD with an annualized yield of 3.25% currently and a 3.45% return on a five-year CD. The minimum deposit is $5,000. The penalty for early withdrawal is 90 days of interest for 12-month CDs and 180 days of interest for all other CDs. Citizens Access also has an online savings account at 3.75%.
Ally Bank has a 12-month CD with a yield of 4.15% online and an 18-month CD with a yield of 4.25% as of December 19th. No minimum deposit required.
Savers who want to lock in prices for five years, Tumin said, may need to act more quickly, as some five-year CD revenues have slumped recently.
The average yield for five-year CDs is 1.16% and it’s around 4.6% for the highest-yielding CDs, according to a Bankrate.com survey.
Again, this is significantly higher than last year when the five-year average CD was 0.26% and CDs with the highest returns were around 1.21%.
McBride said prices on short-term CDs could peak later in 2023, so savers will have more time to move.
more:The Fed chief says that “unacceptably high” inflation should be the Fed’s primary focus
While the Fed will raise interest rates in 2023, many expect it to ease next year and may be nearing the end of its rate hike period. At some point, the expectation is that interest rates will not continue to rise and it may be time to lock in a higher rate for five years.
Should you cash out an old CD early?
For some savers with old CDs, it may even be worth them to take a fine in a CD early. It’s not something you normally think of doing. But Tumin said it can be helpful if you find a much higher rate of 4% or 5%.
Let’s say you only get 0.25% for a CD that won’t mature for another year or two. You could only lose about $3 in interest on, say, a $5,000 CD if the annual yield is 0.25% and your penalty for early withdrawal is three months of interest. You will have to run your own numbers and see what makes sense to you.
Tumin said it’s a very easy bet to make such a move if someone has an old CD rate as low as 0.25% “but even with higher rates on old CDs, it can still be a win,” he said. .
He has a 5 year CD that opened just under three years ago. Closing it early will result in a penalty of losing five months of interest. But this CD only has 2.15% APY and can find a new CD with 4.25% APY. He thinks he can make the extra $393 in interest on his $10,000 savings – even after a fine – by closing the CD and opening a new one at a much higher price.
DepositAccounts.com has a calculator to help figure out if it’s worth paying an early withdrawal penalty for breaking a CD.
Read the fine print
Often, banks and credit unions only offer those higher rates to new customers. Before starting a promotion, find out if you will need to withdraw money from one bank and transfer it to another to secure a higher rate.
Review any terms carefully. Not all penalties for early withdrawal are the same. The penalty is likely to be greater if you take out a five-year CD rather than a one-year CD. And yes, brokers offer prices on CDs too for Bank issued CDs. But Tumin cautions that you want to make sure the CD isn’t “callable” — which means you risk having the bank force you to redeem the CD earlier than the due date if interest rates fall.
Remember, prices don’t always go up – and they keep going.
Contact Suzanne Tombor: email@example.com. Follow her on Twitter @tomorrow. To subscribe, please go to freep.com/specialoffer. read more Business and subscribe to our site Business newsletter.
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