Key Takeaways
- This morning's Consumer Price Index shows the April inflation rate ticked down to 3.4% from March's 3.5% reading.
- Inflation is holding stubbornly above the Fed's 2% target, putting the central bank in "wait and see" mode before reducing the federal funds rate.
- CD rates are directly impacted by the fed funds rate, which has been at a 20-year high since July. As a result, the best CD rates surged to record peaks last fall and have since plateaued slightly lower.
- Today's inflation reading won't likely change the Fed's stance that a rate cut is still a ways off.
- CD rates will therefore also remain roughly steady until the Fed signals it's ready to cut rates, at which time rates on savings accounts and new CDs will begin dropping.
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Inflation Rates vs. CD Rates
What you can earn on a certificate of deposit (CD) is not directly related to the inflation rate. But inflation does influence the Federal Reserve, and then that impacts what banks and credit unions offer for savings and CD returns. Today’s latest inflation report shows the inflation rate thankfully did not increase. But it also didn’t register a meaningful decline.
As a result, the Federal Reserve is likely to continue to hold the fed funds rate steady for some time—which means CD rates are also expected to stay approximately where they are for now.
Understanding Today's Inflation News
Once a month, we get a read on current inflation levels from the latest Consumer Price Index (CPI) release. The April report came out this morning, and as expected, it showed a monthly inflation reading of 3.4%. That’s down from 3.5% in March.
But the April report was also notable for what it didn’t deliver. For the first three readings this year, the monthly report surprised economists and analysts, revealing hotter inflation than predicted. In fact, the March reading was the highest CPI reading in six months.
As a result, all eyes were on today’s April release, watching to see which direction the inflation trend was moving. The good news is that it didn’t climb higher, or even remain steady. On the flip side, however, it moved down only minimally and remains stuck above the Federal Reserve’s target level of 2%.
How Inflation Drove CD Rates to 20-Year Highs
In 2022, post-pandemic inflation hit a 40-year high. That prompted the Fed to embark on an aggressive rate-hike campaign, involving 11 increases to the federal funds rate between March 2022 and July 2023. With the central bank’s benchmark rate pushed up 5.25 percentage points—to its highest level since 2000—the rates that banks and credit unions offered on savings and CD accounts also skyrocketed.
Since July 2023, the Fed has been in a holding pattern, watching and waiting for inflation to fall toward its 2% target level before it makes further rate changes. Early this year, it was expected the Fed would make as many as three rate cuts by the end of 2024. And as a result, CD rates softened a bit after reaching a peak in October and November 2023.
Where Will CD Rates Go in 2024?
Today’s inflation reading is essentially more of the same trend we’ve been seeing—which is that inflation is proving stubborn in the mid-3% range. While markets are relieved the April inflation rate did not come in higher, the tiny downtick isn't likely to change the Fed’s current “wait and see” stance. Inflation approaching 2% still seems a ways off.
That means the federal funds rate is likely to remain where it is for some time, which will likely keep CD rates on their recent plateau. While rates are not quite as high as at the fall peak, the best nationwide CDs are still paying historically high returns, with rates as high as 5.65% APY.
So when will that change? It’s unknown when inflation will start coming down more meaningfully, and when the Fed will feel confident enough in the inflation trend to start considering a rate cut. The central bank makes each rate decision meeting-by-meeting based on the latest economic data.
But fed funds futures traders are continually placing bets, which you can see with the CME Group’s FedWatch Tool. Even after this morning’s latest inflation report, CME shows that a majority of traders predict the first rate cut won’t arrive until September. That’s still three meetings away.
In addition, less than a third of fed funds traders think we’ll see the earlier-predicted three rate cuts in 2024. Instead, more than 60% are forecasting just one to two rate decreases this year.
Of course, as soon as the central bank signals it’s getting ready to reduce rates, banks and credit unions will start easing their foot off the rates pedal. Returns on high-yield savings accounts, money market accounts, and new CDs will all start to decline—even before the first rate cut is officially announced.
That makes now and the next couple of months a great time to lock in one of today’s historically high CD rates, so that you can guarantee it for months or years into the future, no matter what happens with inflation and the Fed.
Best CD Rates for May 2024: Up to 5.65%
Best High-Yield Savings Accounts for May 2024—Up to 5.55%
Best Money Market Account Rates for May 2024—Up to 5.35%
How We Find the Best Savings and CD Rates
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
