1-Year CD Rates Are Up to 5.5%. Should You Open One Now?

While it would have seemed unfathomable just a few years ago, there are 1-year certificates of deposit (CDs) offered by reputable financial institutions with yields significantly over 5% right now.

The U.S. has been in a rising-rate environment for the past couple of years, but how much longer will it last? Should savers lock in these high CD rates now, or will rates stay high for a while?

Today's CD yields are the highest we've seen in years

CD yields vary from bank to bank, but among our top banks for 1-year CDs, current yields range from 4.75% to 5.55%. These are among the highest CD yields we've seen in several years.

Each bank has its own requirements, and some have minimum deposits to open a CD. There are two banks as of this writing that have 1-year CD yields of 5.50% or more. The first is a Sallie Mae CD offering an APY of 5.25%. The second is a LendingClub CD offering an APY of 5.15%. Both have a $2,500 minimum deposit. However, there are several with yields above 5% that don't have any minimum deposit requirements at all.

What would Federal Reserve rate cuts mean to CD yields?

To be sure, CD yields don't have a direct correlation with benchmark interest rates, such as the federal funds rate, which is typically what is being referred to when you hear that the Federal Reserve raised or lowered interest rates.

However, they certainly tend to move in the same direction, and the rapid interest rate hikes made by the Fed over the past couple of years are the primary reason why CD yields are so high right now.

With recent data showing that inflation is cooling off, most experts expect the Fed to start to cut interest rates in 2024. The Fed's latest projections call for three 0.25% rate cuts in 2024, although most investors believe the pace will end up being even more aggressive. According to CME Group's FedWatch tool, the median expectation is for six quarter-percent rate cuts, or a total reduction of 1.5% from current levels. If this were to happen, CD yields wouldn't necessarily move by the same amount, but could be reasonably expected to move lower.

No way to know for sure, but locking in a high rate could be smart

While Fed rate moves don't have a direct correlation with CD rates, they are likely to move in the same direction in 2024.

It's worth noting that while virtually all experts (and the Fed members themselves) expect rates to fall in 2024, it isn't an absolute certainty. And if inflation spikes unexpectedly, it's entirely possible that the Fed could raise rates. In other words, there isn't a guarantee that CD yields will be significantly lower in a year than they are today.

Having said that, all signs are certainly pointing in the direction of lower CD yields. So, if you have some cash on the sidelines that you won't need for at least a year, and you don't want to invest it in the stock market, locking in a higher CD yield today could be a particularly smart move.