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CD Rates Stable Heading Into the End of 2013 But Will Increase in 2014

2013 has been another dismal year for CD rates hovering above record lows. Granted, there are some banks that have increased longer term CD rates late this year in hopes of locking in deposits at lower rates before rates start increasing. These banks realize that the era of ultra low interest rates is almost over and interest rates are heading higher in 2014.

Current CD Rates

Average 1 year CD rates are at 0.78 percent this week, no change from last week's average 1 year rate. The best CD rates available on 1 year certificates of deposits are also unchanged at 1.05 percent APY. While average rates and the highest rates haven't changed much, we are seeing more banks increase 1 year rates.

We now have 5 different banks offering 1 year CD rates at 1.00 percent or higher. Last month we only had 3 banks offering 1 year rates at or over 1.00 percent. Average 2 year CD rates this week are at 1.00 percent, no change from the prior week's average. The best 2 year CD rates available in our database are higher at 1.25 percent with an APY of 1.26 percent.

Bank CD Rates Will Move Higher When the Federal Funds Rate is Increased

When bank CD rates move higher all depends on when the Federal Reserve increases their key benchmark interest rate, the federal funds rate. The fed funds rate has been near zero percent since December 2008 when the Fed lowered the rate to an historic low to get us out of the worst financial crisis since the Great Depression.

Two economic numbers released recently point to an economy that is finally getting stronger and might prompt the Fed to increase the fed funds rate. 3rd quarter GDP growth came in at a respectable 2.8 percent, higher than what analysts had expected. 204,000 jobs were created in October.  That number that was a lot stronger than most analysts were expecting as a result of the government shutdown.

The final piece of the puzzle that will send CD rates at banks and all deposit rates higher is an employment rate of 6.5 percent or lower. The Fed has stated they plan to keep the fed funds rate near zero percent until the unemployment rate falls below that level. The current rate is at 7.3 percent, so we won't see a 6.5 percent rate until the early summer of 2014.

CD Rates and All Deposit Rates Will Increase in the Summer of 2014

Most of the time, the Fed votes to increase or decrease the fed funds rate during one of their scheduled meetings. There is one more scheduled meeting in 2013 and the calendar for the Fed meetings in 2014 are as follows:

  • January 28-29

  • March 18-19

  • April 29-30

  • June 17-18

  • July 29-30

  • September 16-17

  • October 28-29

  • December 16-17

Assuming the unemployment rate falls below 6.5 percent in May or June of 2014, the Fed will then have to act to increase the fed funds rate. From the meeting schedule above, you can see the first Fed meeting that can possibly happen with an unemployment rate below 6.5 percent is in June 2014.

If the Fed decides to increase the fed funds rate during that meeting, we will see higher CD rates right after. Since rates are so low, banks will be very eager to increase their deposit rates to lock in deposits before rates move even higher.

I believe CD rates will move higher in June or July of 2014. Therefore, if you have any CD accounts maturing you should reinvest in shorter term CD accounts of 6 months or less.
Author: Brian McKay
November 14th, 2013