Is This the Golden Age of CDs? No, Not Even Close

Certificates of deposit (CDs) give consumers the chance to lock up a lump sum for a specific amount of time in exchange for a fixed interest rate. The APY on a CD is typically higher than that of most savings and checking accounts, but on average lower than the returns on some high-risk investments, like ETFs and stocks. 

Since the Great Recession years of 2007 and 2008, CDs have had rock bottom rates. In fact, as recently as 2021, banks were issuing CDs with rates as low as 0.30%, though that wasn't as low as 2013 when most banks were paying half of that (0.15%) on 6-month CDs. 

Yet recently CDs have had such high interest rates it's compelled even some equity investors to snag what seems like unbelievable rates of fixed interest. Many short-term CDs are averaging between 4.25% and 5%, with one CD hitting 7% in April. 

It's easy to look at these rates and think, "My goodness, we'll never see CDs rates this high again!" But not so fast -- though CD rates are generous today, they're not nearly as high as they were in the real golden age of CDs: the 1970s and 1980s. 

CDs with an 18% APY? No way  

Yes way. 

The 1970s and 1980s witnessed some of the highest inflation rates in recent U.S. economic history, reaching more than 14% in 1980 before beginning a painful descent. The Federal Reserve employed severe interest rate hikes that brought the federal funds rate to its highest range ever: 19% to 20%. With that came higher borrowing rates, more expensive mortgage payments, and, yes -- very, very generous CDs. 

Throughout the 1970s, CD rates on a 3-month term averaged between 5% and 10%. That's attractive, even by today's standards. But 1981 was when the rates really soared. As the Fed employed a "whatever it takes" approach to squashing inflation, 3-month CD rates began to average 17% to 18%, with some reaching above that. 

Double-digit returns continued until roughly 1984, when they cooled off. By the end of the '80s, rates continued to trend downward -- with brief periods of above average APYs -- before hitting rock bottom in 2007. 

Could today's CD rates hit double digits? 

At this point, it appears unlikely 2023 CD rates will climb as high as they did in the 1980s. 

Based on recent data, the economy appears to be slowing down. The Consumer Price Index (CPI) rose 5% annually in March, down from 6% in April. And even though the U.S. job market seems unscathed -- with no month-to-month change in the unemployment rate -- the nation's GDP grew only 1.1% in Q1 2023, down from 2.6% in Q4 2022. 

That said, the Fed has not announced it will pause its interest rate hiking campaign. But its language has hinted that it might, which has many economists believing that it's very likely it will. 

Since it's unlikely CD rates will go higher, they'll likely take one of two paths: stay the same or drop. Either way, if you plan on locking up some cash in a CD, I wouldn't wait to see what happens. Today's rates are still higher than we've seen since the early 2000s, and they might not stay this way for long.