CD Rates Will Move Higher in the Spring or Summer of 2015

If you haven't been following the Fed news on interest rates recently, the new Fed Chairperson, Janet Yellen, held her first press conference last week after the Fed's March meeting. Yellen might have slipped up when she spoke about when the fed funds rate would be increased and in doing so, spooked the markets.

Until Janet Yellen spoke last week, the general consensus was the Federal Open Market Committee (FOMC) would vote to increase the fed funds rate in the summer of 2015. In last week's press conference, Yellen mentioned that it might be time to increase the fed funds rate six months after the Fed stopped quantitative easing (QE).

The current round of QE, buying long term bonds and mortgage-backed securities, is expected to end the fall of 2014. This would put a possible fed funds rate increase in the spring of 2015, sooner than the markets expected. Whether or not this all plays out remains to be seen but higher CD rates won't come until the fed funds rate is increased.

The last time the fed funds rate was increased was almost 8 years ago when the rate was increased 0.25 percent to 5.25 percent. The last time the FOMC made any change to the fed funds rate was in December 2008 when the rate was lowered to a targeted range of zero percent to one quarter percent. You can view a historical chart of the fed funds rate here: Federal Funds Rate Historical Chart.

Over the past 8 years financial institutions have lowered CD rates, savings account rates, and all deposit rates down to record lows. The current average 1 year CD rate this week is at 0.80 percent. Going out farther on the yield curve doesn't get a much better return.  The current average 5 year CD rate this week is at 1.55 percent, only 75 basis points higher than 1 year rates.

Average CD rates are just averages, there are many banks and credit unions offering CD interest rates much higher than the averages. The best CD rates in our database of 1 year certificates of deposit this week are at 1.04 percent with an APY of 1.05 percent. The highest CD rates in our 5 year CD rate database are at 2.23 percent with an APY of 2.25 percent.

Since CD rates at banks and credit unions are poised to move higher sometime in 2015, make sure you don't lock into a long term CD account in 2014. Make especially sure this doesn't happen with your certificate of deposit accounts that have terms of more than 1 year that are maturing in 2014. Banks and credit unions will automatically roll the account over into a new CD with the same term. You don't want to lock into a 5 year CD account that is earning around 2.00 percent because by the end of 2015, rates will be higher. By the end of next year 1 year CD rates will probably be around 2.00 percent.

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