when considering a cd with a variable interest rate remember a few things first these cds generally have the most significant profit potential if interest rates are low with a good chance rates will rise over the term by contrast if interest rates are high when the cd is opened it s possible that they could go down soon after and take your returns lower too 
also consider what features are most important to you a variable rate cd with a steep penalty for early withdrawal may not be as appealing as a no penalty cd with a more relaxed early withdrawal policy 3as attractive as they sound variable rate cds also come with certain pitfalls prolonged low interest rates for example can adversely affect your returns even if the rates increase later in contrast fixed rate cds may be more profitable during such times variable rate cd returns are also susceptible to inflation this is especially the case during times of high inflation a cd essentially locks in your funds for a certain period of time if inflation shoots up during that period and your returns do not keep pace with it the real value of your holdings declines example of a variable rate cdmeilee wants to park her money in a variable rate cd and spends time researching where it s possible to do so at a higher rate she finds a 12 month cd that offers a variable competitive rate based on the federal reserve s federal funds rate minus 0 25 the federal funds rate is 2 50 when she opens the account so she will earn 2 25 apy to begin with meilee thinks rates will go up and so puts 1 000 into the variable rate cd meilee s friend amy puts 1 000 into a traditional 12 month cd at the same time as meilee the cd offers a 3 interest rate after only one month the federal funds rate increases to 3 25 meilee s variable rate cd now earns 3 the same as amy s the fed rate continues to increase over the next six months until it is at 4 75 in september meilee earns 4 5 in interest in september amy is still earning 3 in september but imagine if meilee was wrong and the federal funds rate declined to 2 after six months meilee would only earn 1 75 on her cd while amy would still be earning 3 