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Interest rates on certificates of deposit (CDs) are expected to decline in 2025. That's after several years of higher-than-average yields. Rates typically move in the same direction as the federal funds rate, which is a benchmark rate set by the Federal Reserve. In September, the Fed cut this rate for the first time in three years, and CD rates have gradually declined since then. More cuts are expected in 2025. Because of this, yields will likely continue to inch downward, as will rates on CDs.
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CD Rates Forecast for 2025
CD rates are expected to continue dropping in 2025. According to its September 2024 report, the Federal Reserve plans to gradually cut the federal funds rate through 2026—with a target rate that's below 2.5%. It's impossible to know for sure how much CD rates will change over the coming year, but it's safe to assume that yields will decrease. This could influence the way you invest in CDs, both in the short and long term. For some context, as of November 2024, some annual percentage yields (APYs) are as high as 4.95%.
Are CD Rates Going Down?
All signs point to yes, but we'll have to wait and see how CD rates change over the next year. The federal funds rate reflects how much banks charge to lend money to each other, but it also affects the rates they offer to consumers. When the federal funds rate goes up, APYs on CDs and savings accounts usually rise too.
Similarly, the Fed rate affects the interest that banks charge on loans and credit cards. You may not earn as much with CDs when rates are on the decline, but you'll likely pay less to borrow money. The opposite also tends to be true.
CD Rate Trends From 2020 to 2024
The federal funds rate was between 1.00% and 1.25% just before the COVID-19 pandemic, and CD yields were relatively modest. The Fed eventually slashed its rate to almost zero. That decreased APYs on CDs. In April 2021, the average 12-month CD rate was only 0.15%. But it also brought down rates on credit cards, loans and mortgages. In other words, it decreased the cost of borrowing, which may have encouraged consumers and businesses to get out and spend—and stimulate the economy.
As consumer goods got more expensive, the Fed began increasing the federal funds rate in an attempt to cool inflation. From July 2023 to September 2024, it held steady between 5.25% and 5.50%. During this time, some CD rates were as high as 5.25%. But the most recent rate cut brought the federal funds rate down by half a percentage point. CD rates have since declined.
Should You Buy CDs in 2025?
The 2025 CD rates forecast might have you asking one obvious question—is now the best time to invest in CDs? The answer depends on your financial situation and goals. Putting money into CDs now, before rates potentially drop, might allow you to lock in a higher yield. The timing might be right if:
- You have a strong emergency fund. The general rule is to set aside three to six months' worth of expenses in emergency savings. (A high-yield savings account can help you get the most out of your savings.) It isn't wise to keep your emergency fund in CDs because you'll likely be charged an early withdrawal penalty if you need to pull money out before the term expires.
- High-interest debt isn't an issue. The interest you'd earn with a CD might not mean much if you're paying higher rates on debt accounts. Paying down those balances will likely be a better use of your money.
- You're saving for a specific goal. Whether you're saving for a down payment on a home or socking money away for your next dream vacation, a CD can help your savings work a little harder—especially if you choose a CD term that matches your investment timeline.
Alternatives to CDs
If you decide that a CD isn't the best option for you right now, there are still other ways to grow your money. Consider these three alternatives to CDs:
- High-yield savings accounts: Unlike a CD, you can access money in a high-yield savings account at any time. Just know that some financial institutions may limit the number of free electronic transfers and withdrawals you can make each month. As of November 2024, some APYs were as high as 5.15%.
- Money market accounts: These allow you to earn interest on your savings, but you'll likely have a debit card or checkbook as well. That makes it easier to use that money to pay bills or fund specific financial goals. At the time of this writing, some rates on money market accounts are up to 5.00%.
- Bonds: When you buy a bond, you're lending money to whoever issued it. The issuer is then expected to repay you with interest. Bonds are available from the federal government, local municipalities and corporations. Just keep in mind that returns are usually modest, and some bonds are callable. That means the issuer can call them back early if they want.
The Bottom Line
CDs carry little risk, and they're especially attractive when interest rates are on the rise. APYs are expected to decline in 2025, but CDs can still be an important part of your investment strategy because they can provide stable returns and diversification. Your financial goals, age and risk tolerance can help you determine if CDs are right for you.