What Factors Control CD Interest Rates?

An interest rate is the amount charged or earned in relation to an amount loaned or investment. There are several factors that influence the CD interest rates offered by financial institutions to their investors in those types of properties.

The Federal Reserve Discount Interest Rate contributes greatly to the amount of yield your CD investment can earn. In general, financial institutions borrow money from the Federal Reserve and like regular customers involved in a loan, they must pay a price for borrowing the money. The board of directors for the Federal Reserve banks sets the interest rate amount. This rate works in direct correlation with the Prime Interest Rate (what highly ranked commercial customers get charged by the bank).

When this rate is lowered, the profit margin of the bank is decreased thus they will not pay out too much for the CD rates in order to keep a system of checks and balances. While lower interest rates are bad for savers, they are excellent for consumers wanting to take out loans and for corporations to borrow money to expand their business.

Additionally, there are lender business factors that will affect the CD rates offered by your bank. Banks are in the business to make money and they all have a cost of operation they need to work into their budgets. That number affects their profit margin. Ultimately a bank cannot pay more interest to their consumers if it is going to decrease their profit margins substantially. That is why historically banks that operate solely online can offer a higher rate of return on a CD than a bank branch; the virtual bank does not have to pay rent and that is not a contributing factor in their bottom line.

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Interest rates are always fluctuating. But remember what goes up must come down and visa-versa!

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What Factors Control CD Interest Rates?
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