Whether you are looking to earn a return on your hard earned money, or are trying to save money on a mortgage you are probably wondering: When are interest rates going to rise? Before we get into our CD interest rate forecast, lets quickly look at where we are currently, and how we got there.
Below is a list of current national average rates for certificates of deposit from bloomberg.com.
Current National CD Rates
1 Year CD: 0.74%
2 Year CD: 0.87%
5 Year CD: 1.37%
By the way, if you want to beat those rates you can do so here, but for our analysis the average rates are what we want.
To see a list of high yielding CDs go here.
So you can also see where we have come from, below is a chart of historical CD Rates going back to 1980:
Where are CD Rates Currently?
As you can see from the above chart, CD rates have been in a large downtrend since 1980, and are currently near historic lows. As rates are not going to fall below zero, there is a floor at 0%, and we are close to that floor.
Because rates are so low, they do not have to move up by much for the CD investor who buys short term CDs today (so their money will not be locked up if interest rates increase) to earn a higher return than the CD investor who purchases a 5 year CD (and is unable to lock in a higher rate when rates rise.
Because rates are so low, investors only need to answer two questions to determine what length CD to purchase:
Question 1: Will CD rates rise in the next 2.5 years?
If CD rates remain at their current levels for the next 2.5 years, the investor who locks in the higher rate that longer term CD’s offer today will have the best return. Even if cd rates move higher after 2.5 years, the extra interest that is available for the longer CD now, is likely to more than compensate for the interest you miss out on if CD rates move higher after 2.5 years.
Question 2: If CD rates do move higher will they move higher by more than 1%?
If CD rates move higher by more than one percent in the next 2.5 years, the investor who chooses lower yielding short term CDs now, and then moves into longer CD’s once CD rates rise by more than 1%, will earn the higher return.
What Factors Into Our CD Rate Forecast?
What could cause CD rates to rise in the next 2.5 years?
There is a large concern among many market participants that the high level of monetary stimulus from the Federal Reserve is going to cause a pickup (perhaps an extreme pickup) in inflation in the near term. If they are correct then we could see CD rates increase substantially.
What could cause CD Rates to remain near the same levels?
Prior to 2008 many people “levered up”, or in other words used credit cards and other forms of borrowing to increase the amount of money they spent on goods and services. Since 2008 the mindset of the consumer has changed, and people are learning to live within their means. While this is a healthy thing in the long term, in the short term this means that there is less demand for goods and services.
Over the last 3 years the US government and the Federal Reserve have stepped in with large stimulus packages and monetary easing to try and fill the void left by the consumer. There is a limit to how much they can do, however, and we may be reaching that limit. To varying degrees this scenario is playing out not just here in the United States but globally as well.
Our CD Interest Rate Forecast:
As interest rates are now close to zero in the US and many developed economies around the world, the ability of central banks to continue to stimulate the economy is hindered greatly. Voters are also putting a lot of pressure on the US Government to decrease rather than increase spending. These facts, combined with the significant headwinds that the economy is already facing, lead us to give the highest probability to rates remaining near current levels for the next 2.5 years.
As discussed above however all of the risk for the CD investor is currently weighted towards missing out on even a relatively small rate increase. Because of this we recommend an equal division of CD portfolios in both long term (5 year CD’s) and short term CD’s (1 year CD’s). This way if rates stay the same as we have forecast, you have locked in the higher rate that 5 year CD’s are currently paying with half of your portfolio. If rates rise by more than 1% then you will be able to take advantage of the higher return offered when your 1 year CD’s mature.
Best CD (Certificate Of Deposit) Rates