Have interest rates on certificates of deposit peaked?

It’s looking like the best time in years — and maybe the best time for awhile — to put money into a savings account or certificate of deposit.

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“Deposit rates are reaching highs not seen in more than a decade,” said Ken Tumin, founder and editor of DepositAccounts.com, which tracks interest rates.

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As a result, “consumers should lock in for favorable rates on CDs now and wait to refinance their mortgages later,” said Tenpao Lee, professor emeritus at Niagara University in New York.

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Mortgage interest rates on a 30-year fixed rate loan, which averaged 3.55% a year ago, averaged 6.13% last week, Freddie Mac reported. That’s down from the November peak of 7.08%.

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The Federal Reserve is expected to boost its key interest rate another quarter point Wednesday, its eighth such increase in the past year. The Fed strategy is to cool demand, which in turn would slow price increases.

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Prices have been rising at a smaller percentage in recent months, so it’s expected that interest rates won’t be going up at the fast pace of 2022.

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“Many people believe that a recession is not avoidable in 2023 which implies lower Gross Domestic Product and less pressure on inflation. If so, the inflation and interest rate are more likely to decline,” Lee said. GDP is the value of the nation’s goods and services.

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At the moment, though, “based on how interest rates are evolving, CDs today are more attractive now than they have been in the last year. That’s especially the case for long-term CDs,” Tumin said.

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Interest rates

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The average online savings account yield is now 3.31%. At the start of 2022, the rate was 0.46%.

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That meant a $10,000 balance would have paid $46 in interest over a year. Today’s average rate would earn the consumer $331, a difference of $285.

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Online one-year CD rates are even higher. The average online one-year CD yield is now 4.37%. At the start of 2022, the rate was 0.51%. That means that for a $10,000 balance, the average increase results in an additional $386 in annual interest.

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In the Sacramento area, rates on one-year CDs, with a minimum balance of no more than $10,000, were as high as a 4.35% annual percentage yield on Tuesday.

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Today’s online savings and money market rates are the highest since early 2008, when there were 16 online savings and money market accounts with yields of between 5% and 5.3%.

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But while today’s rates are higher than in recent years, there’s also a warning from the experts: Longer-term CD rates at banks and credit unions have been declining a bit.

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That’s because markets expect the Fed to slow or stop the rate increases later this year.

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“Banks have also responded to these rate expectations, and many have lowered their long-term CD rates,” Tumin found.

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Rates at “brick and mortar” banks tend to be lower. “Brick-and-mortar banks mostly focus on convenience and relationships. Many don’t try to compete on deposit rates. Thus, their deposit rates don’t respond fast to rising interest rates,” Tumin said.