In dynamic, ever-changing financial markets, interest rates constantly fluctuate. CD rates are no exception. Examining historical CD rates can give us insight into the direction rates may be heading in the future.
The current situation is characterized by declining CD yields, in response to the Federal Reserve’s latest policy pause. The average 6-month CD rate in July 2019 sits at 0.92% APY. What a difference the decades can make: 6-month CD rates had climbed to around 18% in the early 1980s.
Let’s take a deeper look at how historical CD rates have changed over recent decades and what drove these changes. Using available data from the Federal Deposit Insurance Corp. (FDIC), we have compiled a record of 6-month CD rates dating back to the 1980s. Additional term rate data starting in 2010 were added.
It’s important to note that we tracked the federal funds rate, using the effective rate until 2010. After the financial crisis, we began to look more closely at the federal funds target rate.
CD rates in the 1980s
Beginning our look at historical CD interest rates, the early 1980s saw two recessions in the first two years. During the first recession — which lasted from January 1980 to July 1980 — the federal funds rate (shown in gray in the graphic that looks at historical CD rates by year) saw a drastic drop between April and May, falling 6.63 percentage points.
CD rates followed this drop pretty closely. Here, we can see the average 6-month CD rate plummeted from a high of 17.74% in March 1980 to 8.33% in June 1980.
The next recession, from July 1981 to November 1982, caused a similar drop in CD rates, as the 6-month rate dropped by 8.27 percentage points. CD rates never really recovered, remaining below 13% for the rest of the decade.
CD rates in the 1990s
Like in the 1980s, CD rates in the 1990s were almost immediately affected by a recession. From July 1990 to March 1991, the federal funds rate dropped just more than 2%, taking CD rates with it. CD rates continued to drop, reaching a low of 3.16% in 1993.
Then after a steep climb in 1994, the 6-month CD rate peaked at 6.78% in response to the steadily climbing federal funds rate. However, we can see that the 6-month CD rate corrected itself shortly after, when the federal funds rate didn’t match quite as high. After that, rates remained relatively steady, entering December 1999 at 6.07% APY.
CD rates in the 2000s
The aughts were bookended by two recessions, again leading to two huge drops in the federal funds rate and CD rates with both reaching record lows. The first recession, from March to November 2001, ended with the federal funds rate at 2.09%. The average 6-month CD rate fell just as far, landing at 2.03% APY, continuing to inch lower and lower for the next few years.
In 2004, CD rates suddenly began making a steep climb with the federal funds rate. Six-month CD rates peaked at 5.54% APY in July 2006, followed by another short period of relative stability.
Then, of course, the Great Recession hit at the end of 2007 and lasted until mid-2009. The federal funds rate plummeted to just about as low as you could go. However, CD rates didn’t quite follow through as closely as they had in the past. You can see that in mid-2008, CD rates spiked briefly while the federal funds went the opposite way entirely.
“The financial crisis forced banks to end securitization, which resulted in banks having to focus more on deposits,” noted Ken Tumin, founder of DepositAccounts. “That put upward pressure on deposit rates around this time.”
This upward pressure didn’t last long, however. The recession caught up to CD rates at the end of 2008, and the 6-month CD rates closed out the decade at a record low.
CD rates in the 2010s
Coming out of the Great Recession, we’d gotten pretty used to rock bottom CD rates for the past 10 years. Now looking at 6-month, 1-year and 5-year CD rates, we can see that rates across the board took a hit as the federal funds rate remained at its historic 0.25% low.
Six-month and 1-year average CD rates maintained a similarly smooth curve, dipping lowest in the middle of the decade. The 5-year CD rate progression was a bit more choppy, falling about 1.4 percentage points from the start of 2010 to mid-2013, when it hit its lowest point. Meanwhile, 6-month and 1-year rates dropped about 0.69 and 0.86 percentage points, respectively.
The quick succession of Fed rate hikes starting in 2015 breathed some life into CD rates, which started to gain some speed in mid-2018. However, rates quickly tapered off again, on average, with the Fed’s latest pause.
The federal funds rate and CD rates
As you’ve probably noticed, the historical CD rates shown above tend to follow the federal funds rate closely. This is the rate at which banks and credit unions exchange federal funds, held at Federal Reserve Banks. This is still true today. So when the federal funds rate is high, it allows financial institutions to increase their rates and pay out more money to their customers.
On the other hand, the opposite must also be true. When the federal funds rate is low, banks don’t have the room to offer their customers high-yield savings opportunities.
The federal funds rate typically falls when the economy starts slowing or when events occur that will likely weaken the economy. When slowdowns turn into a recession, the federal funds rate usually falls to low levels, like they did in 2001 and December 2008.
CD rates today
We’re finding ourselves in another low-rate environment. Despite the slight climb we saw in 2018 because of the Fed hikes, CD rates are back on the downward trend as the Fed takes a pause on monetary policy. We immediately saw banks downgrade their CD rate offerings in January when the Fed announced that it wouldn’t change the federal funds rate. We’ve seen a steady decline of rates in the months following as well.
Average CD rates across the board are pretty low. The average rate on a 1-year CD in July is 1.38% APY and the average rate in a 5-year CD is 2.19% APY. However, these averages are brought down significantly by traditional brick-and-mortar banks, which tend to offer the lowest rates around. The best CD rates are still earning well above these averages, making for a better savings opportunity if you’re still looking to stash your savings in a CD.