It’s impossible to predict future bank interest rates, and even if we could, different banks offer very different rates. However, with the Federal Reserve starting to lower benchmark interest rates, many banks are lowering their rates on CDs.
How low could they go? Although nobody can predict the future, here’s where I think 1-year CD interest rates will head over the next year, and why.
1-year CDs tend to follow the Fed’s moves closely
To be perfectly clear, CD yields don’t have a direct relationship with the Federal Reserve’s rate cuts. Banks set their own CD rates. But the Fed’s rate moves affect how much it costs banks to borrow money, so they usually influence the direction of CD yields.
Shorter-term CDs, which include 1-year CDs offered by top-notch online banks, tend to follow the Fed’s rate movements closely.
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It’s not a coincidence that the federal funds rate (the rate that is being referred to when someone says the Fed “cut rates”) is set at a target rate of 4.75% to 5.00%, and some of the top banks on our radar offer yields just under that range.
Check out our updated list of the best CD rates to see how much yield you can get right now.
Now, this isn’t an exact science. After all, in the 2020-2021 era, when the Fed held rates at near-zero levels, it was still possible to find a 1-year CD with a yield greater than 1% from reputable online banks. But the point is that short-term CD rates track the Fed’s moves closely, as opposed to longer-term CDs, whose yields are mainly based on future expectations for the interest rate environment.
This is why 5-year CDs typically pay less than comparable 1-year CDs right now, although the former was by far the higher-paying CD before the Fed’s rate-hike cycle began in 2022.
What current expectations are telling us
Nobody has a crystal ball that can tell us exactly what the interest rate environment will be at the end of 2025. After all, at the start of 2022, virtually nobody expected the Federal Reserve to rapidly raise its benchmark rate to combat inflation, but it happened.
Having said that, the latest expectations from the policy makers at the Fed call for a total of a 150-basis-point reduction in the benchmark federal funds rate by the end of 2025, which would result in a target range of 3.25%-3.50%. And while it’s somewhat of a rarity, financial markets seem to agree. The median expectation priced into financial markets is for that exact target range, according to CME Group’s FedWatch tool.
Prediction for 1-year CD rates at the end of 2025
Considering that the top 1-year CD rates right now are in the 4%-4.5%% range as of this writing, my prediction is that we’ll see 1-year CD yields in the 3%-3.25% range from the highest-paying online banks at the end of 2025.
Of course, this depends on the actual trajectory of interest rates between now and then, and it’s important to keep in mind that banks set their own rates on CDs and high-yield savings accounts. In other words, even if interest rates fall considerably, there’s nothing preventing a particular bank from offering a 4% or higher promotional yield on a 1-year CD.
But based on the current expectations for interest rates, I think it’s fair to expect 1-year CD yields in the low-3% range at the end of 2025.