Will CD prices increase in 2022?

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They might – but don’t expect too much.

Key points

  • CDs have paid minimal interest for years.
  • Federal Reserve plans could push CD rates higher this year.

Money you have set aside for short-term expenses or emergencies should be deposited in a savings account. But if you have extra cash on hand that you’re not ready to invest, a certificate of deposit or CD might be a good place for it.

The advantage of CDs is that they tend to pay higher interest rates than savings accounts. The downside, however, is that they require you to lock your money for a predefined period of time. This period can be six months, a year or more. If you cash in your CD before it matures, you may be charged a penalty fee equivalent to several months’ interest.

In recent years, CDs have paid very low rates, making them a less attractive option. But this year, CD rates may rise – albeit modestly – for a big reason.

It’s all about the Federal Reserve

The Federal Reserve recently announced the first of several interest rate hikes this year. Since the Fed intends to raise its federal funds rate several times this year, consumer interest rates should rise.

Now, just so there’s no confusion, the Fed isn’t responsible for setting consumer interest rates, like mortgage rates, credit card rates, and CD rates. Rather, these are set by mortgage lenders, credit card issuers, and banks, respectively. However, Fed actions tend to influence consumer interest rates, so CD rates have the potential to rise.

But if they increase significantly, that’s another story. And most likely, this will not happen.

Right now, you could get a rate of 0.70% on a one-year CD. As 2022 progresses, we could see 1-year CD rates move closer to 1% or maybe even hit that mark. But is that much to write about the house? Not really.

That’s why you shouldn’t rely on a CD as a decades-saving tool. If you have money that you think you’ll need in a few years, it’s not a bad choice to put it in a short-term CD. But you shouldn’t, for example, house your retirement savings on a CD, even if rates go up. This could mean a stunting of your savings.

Are CDs a much better deal than savings accounts?

CDs tend to offer higher interest rates than savings accounts. But they are also more restrictive. And based on today’s rates, you won’t gain much by putting money on a CD as opposed to a regular savings account.

Right now, you can get an interest rate of 0.50% with a regular savings account. Compare that to the 0.70% you might get with a CD, and the difference in interest is minimal. For a $5,000 deposit, you’re talking about $10 extra interest with a CD over the course of a year. It’s certainly not going to make a huge difference to most people’s financial situation.

During times when CDs pay more generously, they tend to make more sense as a savings tool. But we may not get to that point anytime soon, even with the potential for CD rates to rise this year.

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