The Impact of Interest Rates on CDs

Interest rates stand as one of the most sensitive yet influential components of finance. The interest rates banks set on Certificates of Deposit are highly influenced by the Fed Funds rate. Therefore, if the Fed decreases rates, banks typically decrease their rates as well.

While higher interest rates mean paying more for loans, they benefit deposit accounts like CDs by increasing the amount the bank pays you for your deposits. Knowing this, it’s important to keep an eye on current CD interest rates when it comes time to open or renew your certificate of deposit. After all, these rates reflect how much a bank will pay you for your deposits.

Whether this year sees decreased or increased rates, Fifth Third Bank highlights the relationship between interest rates and CDs, exploring how fluctuations can shape your investment strategies and financial goals.

The Basics of CDs

Before diving into the impact of interest rates, it's essential to grasp the basics of Certificates of Deposit. A CD is a type of savings account that typically pays a higher interest rate than a traditional savings account. In exchange for this higher interest rate, account holders agree to keep their money deposited for a fixed period, known as the term or maturity period, which can range from a few months to several years.

Once your CD has reached maturity, you have a few options on what to do next:

1. Withdraw the CD within 10 days of maturity.

2. Renew the CD at our promotional rates within 10 days of maturity.

3. If you don’t act within those 10 days, your CD will be automatically renewed at the bank’s standard rate.

To get an idea of how much your CD may earn once its term is up, check out our CD Maturity Calculator.

If you’re ready to open a Certificate of Deposit, schedule an appointment with Fifth Third Bank to get started.

What to Know About CD Interest Rates

The Federal Reserve (US Central Bank) sets a benchmark interest rate known as the Fed Funds rate, which is based on the economic environment. This benchmark rate influences the rates in which banks across the country, including Fifth Third, set for their deposit accounts. The higher the interest rate on your CD account, the more money it will make as interest income. When Fed Funds interest rates rise, banks tend to set high CD rates, which makes CDs more attractive to investors. Conversely, when Fed Funds decrease rates, as do banks, which can impact the potential earnings for investors.

The influence of interest rate changes on CD returns can be significant, especially for investors with long-term investment horizons.

Consider this scenario: Mr. Brown purchases a 5-year CD with a fixed interest rate of 3%. If the Fed Funds rate rises during his CD's term, new CDs with higher rates will likely become available, leaving Mr. Brown with a below-market rate of return. Conversely, if rates fall, Mr. Brown benefits from having locked in a higher rate at the beginning of his CD term.

Key Factors That Determine CD Rates

How often do CD interest rates change? Generally, there isn't a set rule dictating how often CD interest rates change, as it’s up to the banks. However, the variables below influence how banks set their CD rates.

1. CD term length: The term length of a CD directly influences its interest rate. Bankrate explains that in some cases, banks are willing to offer you a higher rate for longer CD terms, since they require you to lock up your funds for longer. On the other hand, if banks think interest rates are likely to go down, shorter term CDs usually have higher rates than longer ones.

2. Changes to the Fed’s benchmark rate: CD rates typically follow the movement of the federal funds rate. As explained by Forbes Advisor, when the Fed rate rises, CD rates tend to increase as well. When the Fed rate falls, CD rates usually decrease.

3. Treasury yields: Banks utilize the funds obtained from deposits, including CDs, for both lending purposes and investments in Treasuries. When Treasury yields rise, banks may be prompted to raise their CD yields in response.

4. Competition among banks: Similar to how banks offer various interest rates for mortgages, car loans, and credit cards, they also offer competitive CD interest rates. Be sure to do your research before opening or renewing a CD to get the most bang for your buck.

5. Inflation: When inflation is low, interest rates tend to be lower. On the other hand, when inflation is high, interest rates are usually higher.

Open a Certificate of Deposit

Ready to secure your financial future? Fifth Third Bank offers business certificates of deposit accounts in addition to traditional CDs. Open a Certificate of Deposit with Fifth Third Bank and start earning competitive interest rates with peace of mind. Learn more about the difference between CDs and savings accounts, check out our CD options, and schedule time to open an account today.