How do CD rates work?

Interest rates may be on the move again. Following 11 rate hikes in 2022 and 2023, the Federal Reserve (or Fed) announced its first rate cut in four years in late 2024. Considering a long-term view of the Fed Funds rate, however, rates are still elevated, and borrowing costs remain above average relative to the last couple of decades.

Meanwhile, for those looking to earn interest on their money, Certificates of Deposit (CDs) still have historically attractive rates. A CD is essentially an agreement between you and your bank. You agree to deposit your money for a fixed amount of time, and, in return, the bank guarantees you a specific CD interest rate. Because many institutions offer fixed rates on their CD offerings, savers can lock in favorable rates for a while, regardless of what the Fed may or may not do next?

So, what are the current CD rates? And are CD rates going up or down?

How are CD rates determined?

Several factors influence how CD rates work, two of which have the greatest impact:

Current CD rates are affected by the interest rate environment

If you’re wondering when or how CD rates will move in 2025, you should consider the interest rate environment. The higher the interest rate, the more banks are typically willing to pay on deposits—and the opposite is true when rates are low. Although it’s not an exact science, you can expect that as the Fed raises or lowers its rates, banks and credit unions will likely follow suit.

Current CD rates are affected by the length of time until maturity

So how do CD rates work? One factor is the length of time until it matures. This is known as the term of the CD, and it typically falls somewhere between three months and 10 years. As a rule of thumb, the longer the timeframe, the higher the CD rate typically is, though this is likely to change if the Fed is expected to lower rates.

Are CD rates going up or down?

CD rates climbed steadily in 2022, according to Bankrate. And since CD rates are influenced by the Fed’s actions—and some believe the Fed may continue to raise interest rates in 2023, albeit at a slower, more deliberate pace, according to another Bankrate article—it’s probably a good guess that CD rates will also continue to rise, at least for a while.

The Fed typically decides whether to raise rates, lower rates, or keep rates unchanged during its Federal Open Market Committee (FOMC) meetings, which happen eight times a year. In 2022 and 2023, the Fed raised the target federal funds rate (also known as the Federal Reserve interest rate) 11 times to a 23-year high in mid-2023:

Target rate	Rate change	Meeting
0.25% to 0.50%	+25 basis points, or 0.25%	March 2022
0.75% to 1.00%	+50 basis points, or 0.5%	May 2022
1.50% to 1.75%	+75 basis points, or 0.75%	June 2022
2.25% to 2.50%	+75 basis points, or 0.75%	July 2022
3.00% to 3.25%	+75 basis points, or 0.75%	September 2022
3.75% to 4.00%	+75 basis points, or 0.75%	November 2022
4.25% to 4.50%	+50 basis points, or 0.5%	December 2022
4.50% to 4.75%	+25 basis points, or 0.25%	February 2023
4.75% to 5.00%	+25 basis points, or 0.25%	March 2023
5.00% to 5.25%	+25 basis points, or 0.25%	May 2023
5.25% to 5.50%	+25 basis points, or 0.25%	July 2023
4.75% to 5.00%	-50 basis points, or 0.5%	September 2024

In September 2024, however, this trend of rate hikes paused as the Fed announced its first rate cut in four years. Interest rates were lowered by 50 basis points, bringing the target rate to 4.75% to 5.00%.

While rates are unlikely to fall dramatically—barring another pandemic or economic crisis—lower rates at the Fed level tend to mean lower interest rates across banking products, from savings accounts to loans and credit cards.

As the Fed funds rate steadily climbed in 2022 and 2023, CD rates moved higher as well.

How can I get the most favorable CD rates?

Against this backdrop, you’re likely to wonder, “When will CD rates go up again?” It’s impossible to predict since Fed policy depends on several factors, from labor-market strength to inflationary pressures. But for now, rates are still quite favorable for interest-earning assets like CDs, so it’s still a good time to consider opening a CD account.

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Like always, shopping around for the most competitive rates and terms is important. The Discover^® high-yield CD, for instance, allows you to earn guaranteed returns with terms ranging from three months to 10 years.

Another strategy for collecting more interest is to lengthen the term of your CD.

Here are some basic guidelines to follow when choosing the term of your CD:

• Determine how long you are willing to leave your money untouched. Look for the best CD interest rates available within this time frame.
• If interest rates are expected to rise soon, consider a shorter-term CD so that you’re not locked into low yields as rates increase.
• If CD interest rates are expected to be flat or decline, consider choosing a longer-term CD to lock in a better rate.

Don’t forget about potential early withdrawal penalties

CDs typically come with early withdrawal penalties , which can wipe out returns on even the best interest rates if you need to take the money out before the term ends. So make sure the maturity dates you select work with your cash needs and brush up on the different ways to avoid bank fees that can negatively impact your savings.

Looking for more savings vehicles that can take advantage of higher than average interest rates? Check out the benefits of money market accounts.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.

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