No one knows what the April inflation rate is yet, and that figure won’t get reported until next month. If it goes even lower, then today’s top rates look like an even better hedge against inflation. And if inflation continues to fall in coming years, a 35-month CD earning 5.35% could turn out to be an excellent inflation fighter.
Keep in mind that the interest you earn on a CD is taxed as ordinary income. So if your tax rate is 25%, your net gain from a 5% CD is only 3.75%.
Even after taxes, today’s top CD rates are still better at beating inflation than some alternatives. The best high-yield savings accounts earn almost as much as the best CDs right now, with a top rate of 5.02%. But savings earnings are also taxed as ordinary income. And savings rates are variable, meaning they will fluctuate.
On the other hand, a savings account is more liquid than a CD, so you can get your money out sooner, penalty-free, if you need it.
If you’re just concerned about beating inflation and you have a longer time horizon for saving, you may want to look into an I bond, a bond with an inflation-adjusted rate. From now though the end of April you can lock in a rate of 6.89% that will last for six months. After that, it will adjust based on what the current inflation rate is at that time.
You can’t cash in an I bond for at least one year, and you’ll pay a penalty if you withdraw before five years.
How CD Rates Are Determined
Banks and credit unions set interest rates for certificates of deposit based on a number of factors.
Federal Funds Rate
The federal funds rate is the target rate the Federal Reserve sets eight times a year. It is the rate at which banks lend to each other overnight. The fed funds rate is one of the factors that influences the top CD rates.
The Fed makes decisions about rate adjustments based on key economic indicators that may indicate inflation, unemployment, recession, and other issues that affect economic growth. But the inflation rate and the federal funds rate don’t move in lockstep. Inflation began rising in 2021 and the effective rate hit 7.9% in February 2022 before the Fed raised interest rates a quarter of a percent in March 2022. It continued to raise rates more aggressively in 2022, following with smaller rate hikes so far this year.
The Fed’s rate hikes have been helping to slow the rate of inflation, which peaked in June and has fallen steadily ever since. The Fed still wants inflation to drop more. Its target inflation rate is currently 2%, and it’s expected to raise interest rates at least once more this year before possibly beginning to lower them in 2024.
The effective federal funds rate is a volume-weighted median of overnight federal funds transactions reported in the Report of Selected Money Market Rates (FR 2420).
Lending Needs and Other Situation-Specific Factors
Banks and credit unions also determine their CD rates based on how much they need in deposits to help fund loans they want to make to businesses and consumers. Larger banks may have so much money in deposits that they don’t have to offer attractive CD rates in order to raise funds to loan out at a higher rate.
That’s why the average CD rate is still abysmal compared to the federal funds rate. For example, the 1-year average CD rate (the highest-earning term) only pays 1.49%, compared to the effective federal funds rate of 4.65%.
CDs are also considered a liability on an institution’s balance sheet. A bank or credit union may want to keep that number low, and therefore keep its rates low so as to not attract too many CD deposits.
But some financial institutions do actively court depositors, providing market-leading rates. Investopedia data show that many who offer the best rates only do so for a few months, either on their regular CDs or on special CDs that are advertised with a great rate for a promotional period of time. Other institutions consistently offer high-paying CDs and make our list of top rates.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD’s minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
Correction—May 17, 2023: A previous version of this article misstated the impact of the prime rate on savings and CD yields. It also miscalculated the inflation-adjusted return on a CD earning 5% APY and misstated the month when inflation peaked in 2022.