CD Rates Set to Move Higher in 2014
Anyone who has invested in a certificate of deposit over the past 5 years knows how low CD rates have fallen. Ever since the financial crisis and Great Depression of 2007/2008, interest rates have been at record lows. The Federal Reserve Open Market Committee having kept their key benchmark interest rate, the federal funds rate, near zero percent is the reason why bank CD rates are so low.
All deposit rates have fallen to record lows due to the FOMC. Mortgage rates have also fallen to record lows over the past few years based on what the Fed is doing to drive interest rates lower. Mortgage rates have increased over the past several months but deposit rates have not.
CD Rates Remain Low While Mortgage Rates Move Higher
Since the beginning of 2013, long term fixed mortgage rates along with long term bond rates have risen over 1.00 percent. Since the start of the year, average CD rates at banks on both short term and long term certificates of deposit haven't moved much at all. Right now the best CD rates on 1 year certificates of deposit are just above 1.00 percent, showing no change since the start of 2013.
The reason mortgage rates moved higher is long term bond rates moved higher and rates on mortgage loans are tied to long term bond rates. CD rates, savings rates, and all deposit rates haven't budged because these rates are not affected by long term bond rates. Deposit rates are tied to the fed funds rate which the Fed hasn't increased since December 2008.
Expect Higher CD Rates in 2014
After 5 years of record low CD rates, we will finally see rates move higher in 2014. The key thing to watch is the when the nation's unemployment rate falls below 6.5 percent. In every statement that the FOMC has released for over 2 years, they have stated the plan to keep the fed funds rate near zero percent until the unemployment rate falls below 6.5 percent.
The current unemployment rate is at 7.2 percent so we are getting very close to a 6.5 percent rate. Until the government shutdown and possible debt default, it looked as if the unemployment rate might fall to 6.5 percent in the April 2014 employment report. Now that might have been delayed by a month or two.
I expect the Fed to start increasing the fed funds rate sometime in the summer of 2014. When the Fed starts tightening, the increases will come in .50 percent increments and will happen right after each Fed meeting. The Fed is scheduled to meet in June, July, September, October and December of 2014.
If the Fed increases the fed funds rate 50 basis points after each meeting, by the end of 2014 the fed funds rate will be in the 2.50 to 3.00 percent range. A fed funds rate in this range will drive 1 year CD rates to the 3.00 percent to 4.00 percent level.
Best CD Rates This Week
The best 1 year CD rates this week are at 1.04 percent with an APY of 1.05 percent. Since rates are poised to move higher in about 8 months, you can lock into a 1 year CD rate now and when it matures you'll get a rate between 3.00 percent to 4.00 percent.
That being said, you should stay invested in CD terms of 1 year or less. The highest CD rates on 6 month certificates of deposits are exactly at 1.00 percent. The best 3 month CD rates this week are at 0.45 percent.
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