Will CD rates go higher in 2022?

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Maybe so, but don’t expect too much.

Key Point

• CD has paid almost no interest for years.
• CD rates may rise this year due to Federal Reserve plans.

You should keep money in your savings account for immediate expenses and for emergencies. However, if you have extra money on hand and are not ready to invest, a certificate of deposit or a CD may be a better investment.

The advantage of CDs is that they tend to pay higher interest rates than savings accounts. However, the downside is that you have to lock your money for a preset period of time. That period could be 6 months, 1 year, or longer. If you cash in your CDs before they expire, you could be charged a penalty worth several months’ worth of interest.

The price of CDs has dropped so low in recent years that it’s not a very attractive option. But CD rates are likely to go up this year, and he has one big reason for it.

It’s all about the Federal Reserve

The Federal Reserve recently announced the first of several rate hikes this year. Consumer interest rates are expected to rise as the Fed plans to raise the federal funds rate several times this year.

To be clear, the Fed is not in charge of setting consumer rates such as mortgage rates, credit card rates, CD rates. Rather, they are set by mortgage lenders, credit card issuers, and banks respectively. However, CD rates are likely to rise as Fed actions tend to influence consumer rates.

But whether they rise significantly is another story. And most of the time it doesn’t happen.

At this time, a 0.70% rate is possible for a 1-year CD. As 2022 progresses, the CD rate for the year will nimbly approach, or even reach, 1%. But is that all there is to writing home? not really.

So don’t rely on CDs as a savings tool for decades. If you have money that you think you’ll need in a few years, putting it on a short-term CD isn’t a bad choice. But even if interest rates rise, you shouldn’t put your retirement savings in a CD, for example. Doing so could mean stunting savings growth.

Are CDs much better than savings accounts?

CDs tend to offer higher interest rates than savings accounts. But they are also more restrictive. Also, based on today’s rates, you won’t get much benefit from putting money in a CD as opposed to a regular savings account.

Currently, you can earn 0.50% interest on savings accounts. Comparing this to the 0.70% obtained with CD, the difference in interest is negligible. For a $5,000 deposit, you pay an extra $10 in interest on a 1-year CD. It certainly won’t make much of a difference to most people’s financial situation.

In times when CDs are more generously paid, they tend to make more sense as a savings tool. However, even if CD rates are likely to rise this year, we may not reach that point any time soon.