I've noticed the Fed in the US has increased their Fed Fund Rate and the banks in the US have also increased their rates in the Certificate of Deposits (CD) from 0.XX% to 4.XX% since 2021 until now.

However, when the Fed has increased its Fed Fund Rate by 0.75% or 0.5%, the rates of the CD didn't increase by this magnitude in response, so what could generally be the reason of this discrepancy? Also, is there a positive correlation between Feds Fund Rate and rates for CDs? Thank you.


1 Answer 1


Yes there is a positive correlation, but they do not necessarily move in lock-step. The fed funds rate is an overnight borrowing rate, but CDs offer rates that are locked in for a longer period of time, and reflect the market's expectation of future rates, not just the current 1-day rate.

Banks can offer whatever they want for CDs, and the rates are based on these market expectations, competition, and the bank's need for deposits more than the overnight rate.

  • I've looked up what overnight borrowing rate means. It's the interest rate at which a depository institution can lend or borrow funds that are required to meet overnight balances. But what does lending or borrowing funds that are required to meet overnight balances have anything to do with the meaning of feds fund rate? Does being overnight means the fed fund rate changes on an overnight basis? Jan 3, 2023 at 19:46
  • 1
    No - it's what the fed charges for borrowing money "overnight", meaning it's paid back the next day. Banks have to keep certain amounts of money in reserve, and that amount can change daily depending on activity. They can borrow from the fed to meet that reserve, and can loan to the fed to earn interest on their excess funds.
    – D Stanley
    Jan 3, 2023 at 19:55
  • I've also noticed that CD rates generally rise slower than Feds fund rate as the fund rate rises up to a certain point. Is it because banks don't want to increase their CD rate as much as the feds fund rate because CD rates are locked for a certain period and in case the feds fund rate suddenly drops sharply, the banks still have some cushion if they don't increase their CD rates in lock-step as that of feds fund rate that rapidly in the first place? Jan 3, 2023 at 20:35
  • 2
    Possibly - there's also not really a need to react to overnight rates. You could think about overnight and CD rates as "wholesale" and "retail" prices like gasoline. Gas stations don't just react to changes in wholesale gasoline prices, but base their prices on supply and demand, competition, etc.
    – D Stanley
    Jan 3, 2023 at 20:44
  • Thank you @D Stanley Jan 3, 2023 at 20:49

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