Short Answer 
Financial institutions offer higher interest rates for CDs due to the locked-in commitment from depositors, which provides banks with a stable source of funds. The penalties for early withdrawals create lower liquidity, further justifying these rates. Additionally, to remain competitive, banks entice savers with attractive interest rates, especially during periods of economic growth.
1. Locked-In Commitment
When you invest in a Certificate of Deposit (CD), you agree to leave your money deposited for a fixed term, such as six months or one year. This arrangement provides the bank with a guaranteed source of funds for that duration. The bank can then use these funds for various investments, creating financial stability and security.
2. Lower Liquidity
Unlike regular savings accounts, which permit penalties-free withdrawals, CDs impose penalties for early withdrawals. This reduced liquidity means your money is less accessible, prompting banks to offer higher interest rates in exchange for your commitment. As a result, depositors can earn more while banks enjoy a stable capital base.
3. Competitive Interest Rates
To attract savers away from traditional savings accounts, banks frequently offer more enticing interest rates on CDs. These competitive rates become especially appealing during economic growth periods when overall interest rates rise. Consequently, savers benefit from better returns, which incentivizes them to lock in their funds for longer periods.