Inflation is 4%. Combat It With a 6-Month CD That Pays 5.65%

Since peaking at 9.1% last June, inflation has been falling about as steadily as borrowing costs and CD rates have been rising. This month’s inflation rate won’t be reported until mid-July, but if it continues to decline, then today’s best CD rates may be an even stronger hedge against inflation a few months from now. A three-year CD with a 5.13% rate could far exceed price increases if the Fed successfully brings inflation down to its 2% target.

Even factoring in taxes, today’s best CD rates are better at beating inflation than some alternatives. The best high-yield savings accounts today provide interest rates as high as 5.12%, but savings account rates are variable, so they will likely fall once the Federal Reserve starts lowering rates.

Still, savings accounts have the benefit of liquidity, and you can easily access your money without the early withdrawal penalty that most CDs impose.

How CD Rates Are Determined

Banks and credit unions set interest rates for certificates of deposit based on a number of factors. 

Federal Funds Rate

The federal funds rate is the rate at which banks lend to each other overnight. It is set by the Federal Reserve’s policymaking body, the Federal Open Market Committee (FOMC) eight times a year. The fed funds rate is one of the factors that influence the top CD rates.

The Fed bases its rate adjustment decisions on economic indicators such as inflation, unemployment, and the potential for recession. Still, the federal funds rate does not simply mimic the rate of inflation.

The inflation rate began to rise early in 2021 and reached as high as 7.9% in February 2022 before the Fed began to raise interest rates the following month. The Fed then raised interest rates several more times in 2022 and three more times in the first half of 2023 as inflation steadily fell.

The Fed is expected to pause its rate hikes at its meeting ending Wednesday, before picking back up with a small increase at its July meeting, according to the CME FedWatch tool, which uses Fed funds futures contracts to calculate the market’s expectations for monetary policy.

Lending Needs and Other Situation-Specific Factors

For banks and credit unions, having cash available in deposits helps fund loans to consumers and businesses. That need for cash may also play a factor in how much a bank is willing to offer when it comes to CD rates. A large bank that has lots of money in deposits, for instance, might not need to offer competitive CD rates to be able to loan out money at a higher rate.

This is one reason why the average CD rate is far lower than the federal funds rate. The national average rate for a 12-month CD (currently the highest-earning term) is just 1.59%, compared with the effective federal funds rate of 5.06%.

Another factor when it comes to how a bank or credit union sets CD rates is that CDs are actually considered liabilities on those institutions’ balance sheets. A bank may want to keep its liabilities down, and one way to do so is to keep CD rates low, effectively discouraging CD deposits.

On the other hand, some institutions actively seek out depositors by providing much higher rates. Investopedia data show that many who offer the best rates only do so for a few months, either on their regular CDs or on limited-time promotional CDs. Other institutions consistently offer high-paying CDs and make our list of top rates. 

Rate Collection Methodology Disclosure

Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD’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.