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If you’re on a quest to find the highest rates for certificates of deposit, knowing some history can offer some useful perspective. What counts as high yields has changed over time.
CDs have been around in some form since the 19th century and they still appeal today. Unlike a regular savings account, a CD has a fixed rate and term.
In the early 1980s, CD rates reached highs unimaginable now: double digits. Fast-forward to last year, when a five-year CD rate was just above 3% annual percentage yield. Continue on to the present and the best rates tend to be closer to 1.50% APY.
But these numbers don’t tell the whole story. Understanding why rates fluctuate can help adjust your expectations when you're looking for the best CD for you.
» Want to jump to the present? See the best CD rates for this month
CD rates: 1980s to 2000s
The highest CD rates in modern history are decades behind us — around the start of the 1980s. A three-month CD in December 1980 earned 18.65%, according to data from the Federal Reserve Bank of St. Louis. But it wasn’t a time of economic prosperity, with two back-to-back recessions, high unemployment and double-digit inflation.
So why were CD rates decades ago astoundingly high by today’s standards?
During the 1970s and early 1980s, "the Fed raised [its] rates to keep up with inflation," says Gus Faucher, chief economist at PNC Financial Services.
Banks followed the Fed’s lead with higher CD rates. But these CDs' actual return was much lower than the percentages suggest. The reason? High inflation.
Inflation cuts into the spending power of the dollar, making goods today cost more next year. If inflation is, say, 15%, and a CD rate is 17%, then it's beating inflation by 2% — and that would be the real return.
» Use our inflation calculator to learn more.
"Banks could afford to pay those [double-digit] rates because of the high interest rates from the Fed. It became competitive," says Robert Frick, corporate economist at Navy Federal Credit Union. "But as soon as the Fed took its foot off the gas" and lowered its rates, CD rates fell quickly, he says.
Through the '80s and up to today, CD rates have fluctuated in booms and recessions. You could find a 5% CD rate both in the mid-'90s and the mid-2000s, on either side of a short recession in 2001. Then, came the Great Recession from 2007 to 2009, which at the time was the biggest economic downturn since the Great Depression. Recovery in the 2010s didn’t lead to the high CD rates of previous decades.
"Since the Great Recession, we’ve had historically low interest rates," Faucher says.
Average CD rates: 2010-2020
During the past decade, rates stayed relatively flat until December 2015, when the Federal Reserve raised its rate for the first time since the Great Recession.
High-yield CD rates: 2018-2020
But the decade-long slump in rates for traditional bank CDs isn’t the full story.
The highest CD rates tend to be at online banks and credit unions. The rise of online, or internet-based, banks in the 2010s created a new opportunity for savers to lock in CD rates far above national averages. Online banks largely operate without branches and rely on shared ATM networks or none at all, rather than having their own networks. This helps them avoid overhead costs and offer competitive rates.
Credit unions can offer strong rates too, but unlike online banks, nationwide coverage isn’t common. Many restrict membership to certain regions or groups, such as the military.
At the peak in 2019, some online banks and credit unions had five-year CD rates that surpassed 3%. Here’s a look at the past couple of years.
The drop in rates started in summer 2019 when the Fed changed its stance on the economy and lowered its rate. Online banks and credit unions responded promptly.
Where we are now: 2020
In March, the Federal Reserve slashed its rates to nearly zero, and many CD rates dropped quickly in response. The Fed’s action was an effort to stimulate the economy as it struggles with the effects of the coronavirus pandemic.
When the Fed changes its rates, banks and credit unions generally take their cue to do the same for CDs. And they likely won’t raise rates until the Fed does, which probably won’t be for many months, if not until next year.
» Learn more about why CD rates dropped
Choose CDs based on your goals
History provides a helpful snapshot of what counts as high CD rates over time, but the reasons why you would get a CD matter more. Generally, you might take advantage of certificates of deposit to earmark some savings for a big goal within five years, such as buying a car or house. And CDs protect your funds without the volatility of the stock market.
CD rates tend to have higher rates than savings accounts, and once you lock in a CD’s rate, you earn that until the CD expires. CDs are safe because banks and credit unions offer federal deposit insurance to protect your money in case they go bankrupt. This safety measure has been in place since the aftermath of the Great Depression.
When you compare CD rates today, you won’t find the highest yields of all time. But you can still lock in competitive ones, and that might be enough to help with your goals.