Are CD Rates Going Up?
History of Interest Rates
In order to answer this question let’s look back at historic interest rates. The Federal Reserve is responsible for setting and maintaining the monetary policy. They set interest rates for banks to borrow from them also known as the discount rate.
The Fed meets eight times a year to discuss economic conditions and determine if there should be any changes to monetary policy. This can include raising or lowering rates or buying bonds to help stimulate the economy as in quantitative easing.
For the past 10 years, interest rates have been the lowest in history. The reasoning for this is because of the Great Recession. In order to combat this, the Fed lowered rates and started the QE (quantitative easing) process where they were buying billions of dollars worth of bonds.
This was to help stimulate the economy because they were pumping money into the financial system making it cheaper and easier to get. Therefore, when more money is available this encourages productivity around spending both from consumers and businesses.
The Federal Reserve announced last year in September that they do not plan to raise interest rates until 2023. They plan for rates to stay stable until then. The reasoning behind this is COVID-19 and the uncertainty of economic recovery therefore keeping rates low will help consumers and business owners spend more money, in theory.
Rates Going Forward
You can only take what the Fed says with a grain of salt. They could change their mind the next time they meet. That said, when they started raising rates in recent years in 2015 through 2018 they only were raising them by 0.25% each quarter, so it’s not necessarily a huge increase.
I don’t expect rates to stay level this year and into 2022. Once the COVID-19 vaccine has been fully rolled out they will start to consider increasing them. Any increase will be gradual over time.
I’d be less concerned about an increase in interest rates and more concerned about your overall investment portfolio. An increase in interest rates will likely not be very material. How you’re invested overall for retirement is much more important.
An increase in rates will put downward pressure on your CDs. This is because an uptick in rates makes your CD less valuable due to its lower rate. A buyer can go out and get a CD that pays a higher interest rate. This makes your CD less attractive.
Interest rates will have to go up at some point so expect an increase in the coming years. Time will tell when this will happen. I believe once the economy gets back on track the Fed will entertain the thought. Increasing rates along with inflation are signs of a healthy economy. We can expect these things to happen as we get back to full employment.