Key Takeaways:
- The Consumer Price Index for April shows a slight decrease in the inflation rate to 3.4% from the previous month.
- Inflation remains above the Fed’s target of 2%, leading the central bank to maintain a cautious approach to interest rate adjustments.
- CD rates are influenced by the federal funds rate, which has been at a 20-year high since July, impacting the returns on savings and CD accounts.
- Despite today’s inflation data, the Fed’s stance on rate cuts is unlikely to change significantly in the near future.
- CD rates are expected to remain stable until the Fed indicates a readiness to reduce rates, signaling a potential decrease in savings and CD rates.
Inflation Rates vs. CD Rates
While the return on a certificate of deposit (CD) is not directly tied to inflation, the Federal Reserve’s response to inflation levels influences the interest rates offered by financial institutions on savings and CD accounts. The latest inflation report reveals a slight decrease in the inflation rate without a substantial decline.
Understanding Today’s Inflation News
The monthly release of the Consumer Price Index provides insights into current inflation levels. The April report indicates a 3.4% inflation rate, showing a minimal decrease from the previous month. Despite this decline, inflation continues to exceed the Federal Reserve’s target of 2%.
How Inflation Drove CD Rates to 20-Year Highs
In response to post-pandemic inflation reaching a 40-year high in 2022, the Federal Reserve implemented multiple rate hikes, resulting in elevated federal funds rates. Consequently, banks and credit unions raised the rates on savings and CD accounts to record highs. Following a period of rate cuts speculation, CD rates moderated after reaching peak levels in late 2023.
Where Will CD Rates Go in 2024?
With inflation persisting around 3%, it is unlikely to prompt immediate changes in the federal funds rate, thereby keeping CD rates relatively stable. While CD rates have slightly decreased from their peak, some institutions still offer historically high returns, with rates as lucrative as 5.65% APY.
Anticipating a potential rate cut, traders predict minimal adjustments until September, with expectations shifting towards fewer rate cuts in 2024 compared to earlier forecasts.
How We Find the Best Savings and CD Rates
Investopedia diligently evaluates over 200 banks and credit unions daily to rank the top-paying savings and CD accounts available nationwide. Institutions must be federally insured, and account requirements are limited to a maximum initial deposit of $25,000. Further criteria include availability in at least 40 states for banks and manageable eligibility standards for credit unions. For comprehensive details on our selection process, refer to our full methodology.