The impact of Fed rates on regular and jumbo certificate rates

May 30, 2023

By Lois Sullivan

The impact of Fed rates on regular and jumbo certificate rates

Middle-aged woman and a younger woman happily move to next level on an escalator while discussing jumbo certificates (aka jumbo CDs)

If you have a large sum of funds in your checking account, you may be researching the best ways to invest. A jumbo certificate may be your best option if you're looking for a relatively low-risk investment that doesn't tie up your funds for many years. With the Federal Reserve increasing interest rates this year, credit unions and banks are willing to offer consumers higher returns on certificates. Learn what a jumbo certificate is and how changing interest rates influence your returns.

What is a jumbo certificate?

A jumbo certificate (also known as a jumbo certificate of deposit or CD) is similar to a regular certificate, except it typically has a minimum deposit requirement of at least $75,000 or $100,000. Financial institutions usually pay a higher return on jumbo certificates.

Your return on a jumbo certificate is listed as an interest rate or annual percentage yield (APY). Credit unions and banks frequently adjust APYs based on market conditions. Understanding what influences these rates can help you time your investment to qualify for the best rate possible.

Who sets interest rates?

The Federal Reserve (commonly referred to as “the Fed”) is in charge of interest rates, which is the cost of borrowing money. The Fed adjusts interest rates on reserve balances to influence the supply and demand of financial institution lending. Adjusting interest rates allows the Fed to influence consumer spending habits and combat inflation. Generally, the Fed decreases rates to stimulate the economy and increases them to manage inflation.

How does the Fed affect certificate rates?

With federal funds rates very high this year, it's essential to understand how they influence regular and jumbo certificate rates. Fed rates don't have a direct impact on certificate rates, but they do indirectly influence them. Traditionally, as Fed rates increase, so do regular and jumbo certificate rates. Higher interest rates mean banks and credit unions earn more, which means they're more likely to pass on those savings to the consumer through higher certificate rates. Lower interest rates mean banks and credit unions earn less, meaning they're likely to offer lower rates.

It's important to note that a direct correlation between Fed rate adjustments and certificate rates isn't always guaranteed. Additionally, some financial institutions may take longer than others to adjust their rates, making it essential to shop around. For example, credit unions or online banks may respond to Fed rate changes more quickly. This can make the rates available from smaller financial institutions s more competitive than larger banking institutions.

The Fed meets every six to eight weeks over two days to determine whether to increase, decrease or maintain rates. While the Fed's decision doesn't determine how much banks or credit unions are willing to pay consumers for certificates, it often influences their decisions.

Savings accounts vs. certificates

With fluctuating interest rates, it's essential to not only compare regular and jumbo certificates against each other to find the best rate but also against other investment types. Savings accounts and certificates carry similar risks, except that with a savings account, you can withdraw your money whenever you want. However, savings accounts typically have much lower APYs than certificates. Checking accounts have even lower APYs than savings accounts and regular and jumbo certificates.

High-performance savings accounts tend to have lower returns than regular or jumbo certificates. Additionally, banks can adjust savings account rates at any time. When you purchase a certificate, you're locked into the rate at the time of purchase.

Jumbo vs. regular certificate rates

Jumbo and regular certificates carry a similar level of risk, and both are insured up to $250,000. The National Credit Union Association (NCUA) covers deposits and certificates at credit unions and the Federal Deposit Insurance Corporation (FDIC) covers certificates issued by banks.* The minimum deposit requirement is the biggest difference between a regular and a jumbo certificate. A jumbo certificate requires a much higher initial deposit than a regular certificate. In return, you'll usually receive a higher rate, which means you can earn more.

Certificate rate expectations for 2023

Increasing interest rates can mean higher regular and jumbo certificate rates in 2023. It's still difficult to predict how the fluctuating interest rates will affect certificate rates long term. Whether the Federal Reserve continues increasing rates or eventually brings them back down will significantly affect expected upcoming certificate rates. However, many economists predict that certificate rates should begin declining again in 2024 and 2025. This makes investing in a regular or jumbo certificate a good decision now.

Other factors may influence certificate rates for 2023, including individual banks' performance and inflation levels.

How to find the best certificate rates

These buying strategies can help you find the best regular and jumbo certificate rates:

  • Consider credit unions or smaller banks: Credit unions and smaller banks usually respond to increasing interest rates much faster.
  • Be willing to invest longer: Investing your funds into longer certificates can qualify you for a higher rate.
  • Monitor interest and certificate rates: Monitoring Fed interest rate adjustments and certificate rates can help you anticipate the best time to buy.
  • Look for consistency rather than APY: A high APY doesn't always mean a good buy. Instead, look for consistency and payouts among financial institutions.
  • Ensure you're protected: Choose certificates from NCUA or FDIC-insured lenders, which means your investment will be protected up to $250,000 per each account ownership category.

Timing the market to get the best certificate rates isn't always possible. If you wait too long, you could miss out on higher-than-average returns. If you buy too soon, you could lose out on high yields if rates increase. If you’re ready to save with a certificate, Alliant offers several convenient ways for you to open a regular or jumbo certificate.* If you're already an Alliant member, just log in to online banking, select Open a New Account in the left sidebar and follow the prompts. If you're not yet a member, review our Certificates page for steps on how to apply.

Want to learn more about certificates? Check out these other articles:

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* Your deposits are federally insured up to $250,000 and backed by the full faith and credit of the United States Government.

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