Here's Just How High CD Rates Could Go in 2023

There's no way to know for sure what could happen, but here's what you need to know.

Inflation is at a four-decade high and the Federal Reserve has been aggressively raising benchmark interest rates in an attempt to cool things off. And as a result, deposit interest rates have become significantly higher over the past year or so, making risk-free investments such as CDs far more attractive than in recent years.

While CD rates have increased sharply so far in 2022, many experts believe they could keep moving higher in 2023. Here's what CDs pay now, where CD interest rates could be heading, and what you should do if you have cash on the sidelines.

How much do CDs pay now?

There is a ton of variation between banks when it comes to CD rates. Branch-based banks tend to pay relatively low rates, while online-based institutions typically have higher rates. For the purposes of this discussion, we'll look at the latter, as it's generally the best way to get the most yield for your CD dollars.

As of Oct. 2022, our favorite online banks have 1-year CD rates that are generally in the 3% to 3.5% range, with a high of 3.6%. For 5-year CDs, most of our top banks have interest rates in the 3.5% to 3.8%, with a top yield of 4.25%.

How high can CD rates get?

It's tough to say how high CD rates could get in 2023, for a few reasons. For one thing, there's a tremendous variation between the CD rates offered by different banks. Online-based financial institutions in particular tend to pay CD interest rates that are significantly higher than branch-based banks.

Second, CD rates aren't directly tied to any benchmark interest rate. In other words, if the Federal Reserve raises the federal funds rate by 0.5%, it doesn't necessarily mean that CD rates will rise by the same amount.

Having said that, CD rates and the Fed's interest rate moves tend to move in the same direction over time. This is why CD rates are significantly higher than they were a year ago.

There's no way to know for sure how aggressive the Fed will be with interest rate increases, and it largely depends on how quickly inflation can be brought under control. With that in mind, the consensus is calling for the benchmark federal funds rate to rise by another 175 basis points (1.75%) by mid-2023. And if this were to happen, it's fair to expect CD rates to gravitate upward as well.

Experts generally agree that CD rates are likely to climb over the next year or so, with most estimates for 5-year CD rates ranging from 4%-5% by the end of 2023.

Should you get a CD now or wait for rates to rise?

To be perfectly clear, there's no guarantee that CD interest rates will be higher next year. In fact, if inflation gets under control, it's entirely possible that the Fed could start to lower interest rates in 2023, which would likely have the opposite effect. So, if you have some cash on the sidelines earmarked for a CD, it's not necessarily the best idea to wait for rates to rise. After all, rates are already far more attractive than they were just a year ago.