CD rates are falling, but the timing and size of the drop depends on what the Federal Reserve does next

CD rates have moved down from their 2023 highs, when some banks offered 5% or higher on one-year CDs. Where rates sit now varies by bank and term length — some institutions still offer 4.5% to 5% on certain CDs, while others have dropped to 3.5% to 4%. The direction of rates depends almost entirely on the Federal Reserve's interest rate decisions, which affect what banks are willing to pay you.

The Federal Reserve raised its benchmark rate sharply between 2022 and 2023 to fight inflation. Banks passed those increases to savers by offering higher CD rates. As inflation cooled and the Fed signaled it might hold rates steady or cut them, banks began lowering what they pay on new CDs. If the Fed cuts rates in the coming months, CD rates will likely fall further. If the Fed keeps rates where they are, CD rates may stabilize.

Key Takeaways

  • CD rates peaked in 2023 when the Federal Reserve's benchmark rate was at its highest, and have declined as inflation cooled.
  • The rate you see today on a new CD depends on the bank, the term length (three months to five years), and current Fed policy.
  • Rates on existing CDs are locked in and will not change, even if new CDs offer less when your CD matures.
  • Comparing rates across banks matters now more than ever, because the difference between a 3.5% CD and a 4.5% CD adds up significantly over time.

Why CD rates move with Federal Reserve decisions

Banks do not set CD rates in a vacuum. The Federal Reserve sets a target range for the federal funds rate — the rate banks charge each other for overnight loans. When that rate is high, banks have less incentive to pay you high rates on CDs because they can earn more from other sources. When the Fed signals it will lower rates, banks begin lowering CD rates in advance, preparing for the smaller spread they will earn.

The Fed raised rates from near zero in early 2022 to a range of 5.25% to 5.50% by mid-2023, where it held steady through 2024. During that holding period, CD rates stabilized at elevated levels. If the Fed begins cutting rates — which many economists expect — banks will lower CD rates in response, sometimes within weeks of a Fed announcement.

How to compare current CD rates across banks

CD rates vary significantly by institution. A large national bank like Chase or Bank of America may offer 4.0% on a one-year CD, while an online bank like Marcus or Ally might offer 4.5% or higher on the same term. Credit unions sometimes offer competitive rates as well, though you must be a member to open a CD there.

To find the best rate, check rate-comparison websites that update daily, such as Bankrate, DepositAccounts, or the FDIC's own rate search tool. Look at the annual percentage yield (APY), not just the interest rate — APY accounts for how often interest compounds and shows you the true return. Pay attention to the term length too: a five-year CD will almost always pay less than a one-year CD right now, because lenders are uncertain about where rates will be in five years.

The difference between locking in a rate now versus waiting

If you open a CD today at 4.5%, that rate is locked in for the entire term — whether rates fall to 3% or rise to 6%, you keep 4.5%. This is both a protection and a risk. If rates fall, you benefit. If rates rise sharply, you miss out on the higher rate.

The decision to lock in now or wait depends on your view of where rates are headed and how soon you need the money. If you believe rates will fall further, locking in a 4.5% rate now protects you. If you think rates might rise, waiting could pay off — but there is no way to know for certain. A middle approach is to ladder CDs: open several CDs with different maturity dates (three months, one year, three years) so that portions of your money mature at different times and you can reinvest at whatever rates are available then.

What happens to your CD when rates drop

Your existing CD is unaffected. If you own a CD paying 4.5% that matures in two years, you will earn 4.5% for the full two years, regardless of what new CDs pay when you open them. The rate is locked in from the day you fund the CD.

The challenge comes at maturity. When your CD matures, the bank will offer you a new CD at the current rate, which may be lower than what you were earning. You can accept the new rate, move your money to a different bank offering a better rate, or move it to a savings account or money market account. Many banks count on customers not shopping around at maturity and simply accepting the renewal rate, so reading your maturity notice carefully and comparing options is worth the time.

How long CD rates might stay elevated

No one can predict exactly when or how much the Fed will cut rates. Economic forecasts change as inflation data, employment reports, and other indicators come in. Some economists expect rate cuts to begin in the second half of 2024 or early 2025, while others think the Fed will hold steady longer. Each Fed decision affects CD rates within days or weeks.

If you are saving for a goal more than a year away and want certainty, locking in a current rate protects you from further declines. If you are saving for something sooner, a shorter-term CD (three or six months) lets you reinvest more frequently if rates do fall. The key is understanding that CD rates will not stay at 2023 levels indefinitely — they will move with Fed policy and economic conditions.

Frequently Asked Questions

Will CD rates go back up to 5% or higher?

That depends on whether the Fed raises rates again, which would only happen if inflation surges. Most forecasters expect rates to stay flat or decline over the next year or two, making a return to 5%+ CDs unlikely in the near term. Rates could rise again in the future, but there is no timeline for that.

Is it better to buy a CD now or wait for rates to drop further?

If you believe rates will drop, locking in now protects you. If you think they might rise, waiting could pay off. A practical middle ground is laddering: open CDs with staggered maturity dates so you reinvest portions of your money at different times and capture whatever rates are available then.

What is the difference between a CD rate and APY?

The interest rate is the percentage the bank pays you. APY (annual percentage yield) is the true return after accounting for how often interest compounds. Always compare APY, not just the rate, because compounding frequency varies by bank and affects your total earnings.

Can I withdraw money from a CD early without a penalty?

Most CDs charge an early withdrawal penalty if you take your money out before maturity. The penalty varies by bank and term length — it might be one month's interest or three months' interest. Some banks offer no-penalty CDs, but they typically pay lower rates. Read the terms before you open a CD.

Should I move my money to a different bank if my CD rate is lower than what new CDs pay?

Only at maturity, when your CD expires and the bank offers you a renewal rate. At that point, comparing what other banks offer is smart — you can move your money without penalty. Do not withdraw early from a CD that still has time left, because the penalty usually outweighs any rate gain elsewhere.