- Since early 2022, the Federal Reserve has been aggressively driving up interest rates to combat extreme inflationary pressure.
- For CD investors, higher rates have been well received, prompting some to optimistically hunt for the 6% CD. Unfortunately, such a high-octane instrument does not exist.
- There are several attractive alternatives to the 6% CD, all of which exhibit low-risk, stable-value profiles.
- The federal funds rate would have to rise about 1% before we see a 6% CD.
Do 6% Certificates of Deposit Exist?
Lately, there has been a lot of talk around the 6% CD rate and whether this rate of return is achievable. The short answer is no — at least, not as of March 2023.
But since early 2022, the Federal Reserve has been aggressively tightening the supply of money to blunt extreme inflationary pressure. In turn, this has put upward pressure on interest rates for loans and investment vehicles of all types.
The result has been a challenging environment for borrowers, but a very rewarding one for income-oriented investors. After over a decade of near-zero interest rates, some real money can finally be earned by investing in low-risk, high-quality debt instruments and savings vehicles, such as certificates of deposit (CDs).
The best CD rates, which are consistently about five times the national average, are usually comparable to the federal funds rate, which is the overnight lending rate for depository institutions. As of March 12, 2023, the federal funds rate reflects a range of 4.5% to 4.75% — a significant distance from 6%.
Generally, the highest CD rates in the market are comparable to the federal funds rate. Some CD rates exceed the federal funds rate, but it is very rare to see a CD rate that exceeds the rate of inflation.
There is nothing preventing a bank or credit union from issuing a CD that offers a rate that significantly exceeds the federal funds rate, but it is not something you should expect to see, given the highly competitive nature of the banking industry.
Today, the most competitive CD rates fall between 4.5% and 5%. If the Fed continues to hike rates, CD rates will rise — potentially to the 6% mark.
A CD is a stable investment that offers benefits to a balanced portfolio. Contact a qualified investment advisor to see if a CD will help to achieve your investment goals.
Alternatives to 6% CDs
As noted, getting your hands on a 6% CD is not feasible in the current interest rate environment. Earning such a high rate of return entails assuming much more risk than exhibited by a federally insured time deposit. That said, there are several attractive alternatives to the 6% CD, all of which exhibit low-risk, stable-value profiles.
CDs with a Lower Interest Rate
The most logical alternative to the 6% CD is a lower-yielding CD. Most CDs reflect terms between 30 days and five years. Today, the one-year term is the best place to invest. Top-tier issuers are offering between 4.50% and 5.00% on these instruments, but rates change daily.
Another solid alternative is a fixed annuity. In exchange for an upfront cash payment, this low-risk insurance contract provides you a guaranteed stream of income, in some instances, for life. Fixed annuities can be structured in many ways with a variety of special add-on features, known as riders.
As a result, yields can vary widely. Today, the most competitive products are offering an annuity rate between 5% and 5.5%.
U.S. Treasury Bills
A third option is to invest in U.S. Treasury bills, which are short-term debt instruments backed by the full faith and credit of the U.S. government. The terms available span from one month to one year. Today, the most attractive tenures are the three-, four- and six-month Treasury bills, all of which are offering a yield between 4.5% and 5%.
High-Yield Savings Accounts
A final, relatively low-yielding alternative to the 6% CD is a high-yield savings account. Typically offered by online banks, these vehicles offer yields that far exceed traditional savings accounts, and they do not require you to lock up your money.
However, unlike fixed-rate CDs, the interest rates offered a high-yield saving account can change at any time. Today, the most competitive high-yield savings accounts offer interest rates around 4.5%.
What Are the Average Rates for CDs?
CD rates vary depending on the interest rate environment in which they are issued. As the federal funds rate increases, CD rates usually rise. Conversely, as it declines, CD rates usually fall. Additionally, the longer the CD term and the higher the deposit amount, generally, the higher the interest rate.
A CD rate is expressed as an annual percentage yield (APY), which is a measure of the total, compound interest you can expect to receive over a one-year period on your investment.
According to the Federal Deposit Insurance Corporation (FDIC), the national average rates for common CD terms are as follows.
National Average CD Rates As of March 20, 2023
|CD Term||CD Rate|
These rates are far from impressive, but remember, they reflect national averages. Remember, the best CD rates are typically far higher and largely comparable to the federal funds rate, which is currently at a range of 4.5% to 4.75%.
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What To Expect in 2023
The Federal Reserve began to slow the pace of its rate hikes in late 2022, but persistent inflationary pressure suggests we are likely to see more rate hikes in 2023. The latest rate hike by the Feds took place on March 22, 2023, with a 0.25% increase. Beyond that, it is not hard to envision another rate hike or two over the balance of the year.
If the federal funds rate reaches a range of 5.5% to 5.75%, getting your hands on a 6% CD is very likely.
However, the Fed has driven up interest rates at a rapid pace, and the economy is beginning to show some signs of weakness. If the Fed continues to move aggressively, without appreciation for the full effect of its actions, it could tip us into a painful recession.