While 2024 has, at least so far, come with more economic stability than the previous few years, inflation and interest rates are still above pre-pandemic norms. The Fed Funds rate has remained unchanged currently at between 5.25% and 5.50% — and inflation was at 3.3% in May. An inflation rate in the mid-3% range is welcome after the 9.1% peak that occurred in mid-2022. However, it’s still above the Federal Reserve’s goal of 2%, which has, in turn, delayed rate cuts. 

Higher interest rates have been tough on homebuyers and people with high credit card balances, but helpful for those with money in interest-yielding accounts, like certificates of deposit (CDs). The average rate on a 12-month CD is currently 1.80%, up from 0.14% in March 2021, according to the Federal Reserve. However, many banks are offering rates up to 4% to 5% or more, despite slight decreases in rates in recent months. 

“More and more banks are dropping rates closer to 5% and slightly below for their six- to 12-month products,” says Christopher M. Naghibi, Esq., executive vice president and chief operating officer at First Foundation Bank. But while CD rates have been dropping slightly over the last few months, what factors, if any, drive up the rates on these deposit accounts in the future?

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3 things that could make CD rates rise even higher, according to experts

According to experts, the following factors could cause CD rates to increase: 

Fed rate increases

“While the Fed doesn’t set CD rates, market interest rates are markedly influenced by Fed actions and CD rate changes mirror Fed Funds Rate changes,” says Robert Johnson, PhD, CFA, CAIA, CLF, chairman and CEO at Economic Index Associates.

As a result, Johnson says the biggest factor influencing CD rates is the Federal Reserve’s monetary policy. 

“The CME Group compiles the view on interest rates via its Fed Watch Tool based upon Fed Funds futures contract prices,” says Johnson. “By the end of the year there is a 12.2% probability that the target Fed Funds rate will be higher than today; a 38.5% probability that the rate will be the same as today and a 49.3% probability that it will be lower than it is today.”

Despite the odds, if the Fed rate ends up increasing, or data suggests it will, CD rates will likely follow suit. 

“Since the Fed is ‘data dependent,’ any data releases which support rate cuts, increases, or even holding rates will have incremental impacts on the CD rate market,” says Naghibi. 

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Unexpected inflation increases

“Although tied to Fed rate increases, inflation could also cause CD rates to be higher,” says Brittany Pederson, director of deposit and payment operations at Georgia’s Own Credit Union. 

Robert Johnson, PhD, CFA, CAIA, CLF, chairman and CEO at Economic Index Associates, agrees. 

“Rates on CDs could go higher if the Fed is surprised on the inflation front. That is, if in the next few months this admittedly data-driven Fed is surprised on the upside by inflation — that inflation runs hotter than expected,” Johnson says. 

Increasing competition

The rates on CDs could also be impacted if banks find themselves in need of deposits to, for example, extend more loans. 

“Competition and a need for deposits can also drive up CD rates,” says Pederson. 

“I think that higher interest rates for savers will only happen once banks have a greater need for deposits and consumers demand to be paid more,” Aaron Sherman, CFP and president of Odyssey Group Wealth Advisors, says.

Benefits of locking in a CD rate now 

Locking in a CD rate now can help you take advantage of the current rates for a set period, no matter what happens in the market. 

“Consumers can take advantage of the high-rate environment by locking in CDs, especially those in the six- to twelve-month timeframe, to maximize returns,” says Mary Hines Droesch, head of consumer and small business products at Bank of America. 

Naghibi agrees but recommends the 1-year CD term. 

“You may want to lock in a 12-month CD rate at the highest rate you can find now, rates are likely to be coming down leading up to and after September,” Naghibi says. 

And if you want to continue to lock in rates in the coming months, consider building a CD ladder. 

“A good way to get ahead of market fluctuations is to implement a CD-laddering strategy to take advantage of current rates and still have the opportunity to open new CDs in the future,” says Hines Droesch.