CD Rates Are Now Above 5%, but They Still Don't Come Close to 1980s' Returns


A person sitting on a couch and writing on a piece of paper next to a laptop open on a table.
A person sitting on a couch and writing on a piece of paper next to a laptop open on a table.

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Certificate of deposit (CD) rates have ticked higher over the past two years as the Federal Reserve has raised interest rates to combat inflation.

While inflation has damaged many Americans' finances, CDs paying an annual percentage yield (APY) of 5.00% have been excellent for many people's bottom lines. The high rates have helped some people, at least partly, outpace inflation's impact on their money.

But even these high APYs don't compare with CD rates of the early 1980s. Here's how high they reached more than 40 years ago and why CDs can still be a good option for some of your cash.

3-month CD rates were over 18% in 1981

In August 1981, 3-month CDs reached an average rate of 18.6%, and 6-month CDs averaged 17.9%! To put that in perspective, the S&P 500 has a historical annual rate of return of just over 10%.

But those high rates resulted from difficult economic conditions, in which inflation ran rampant at 12.4% in 1980. In contrast, the latest inflation report for May 2024 showed inflation slowing to just 3.3%.

The current inflation fight isn't over just yet, which means that CD rates could remain elevated for a bit longer. But you might not want to wait long to open one. Some experts think the Federal Reserve could cut interest rates this year, negatively impacting CD rates.

Three reasons to consider opening a CD

CDs aren't for everyone, but they can be a great place to protect cash from inflation's eroding effects. If you need a little convincing, here are three reasons why CDs are a good option.

1. A nearly-guaranteed interest rate

One significant benefit of CDs is that their APYs are nearly guaranteed. As long as you leave your money in the CD for the entire term, you can earn the quoted interest rate.

Many banks often charge a penalty of 90 days of simple interest for early withdrawals from CDs with term lengths of two years or less and 180 days for CDs with longer terms. Some no-penalty CDs are also available, but may pay a lower interest rate.

2. They're a safe place for your money

CDs are FDIC insured, just like savings accounts, (as long as you choose to bank with an FDIC-insured institution), which means you're guaranteed to get your money back in case of a bank failure. FDIC-insured accounts are good for up to $250,000 per account holder, per bank.

3. Low minimum deposit amounts

Many CDs have deposit amounts as low as $0 or $1, making it easy for nearly anyone to open a CD.

Just keep in mind that some CDs pay higher rates for larger amounts. So be sure to check the interest rate and the deposit amount required before you sign up.

Now could be an excellent time to move some cash into a CD, while rates are still high. If the Fed cuts rates later this year, CD returns will likely drop. This means locking in a high rate right now will help you avoid settling for a lower CD rate later.

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