It is Probably Not the Time to Rush Into CDs

As interest rates have come down dramatically, following the Fed’s emergency response to the virus, savings and money market rates have become very unappetizing. As of this writing, all major online banks have dropped their online rates to 0.80% APY, with some having gone to 0.60% APY.

The Federal Reserve and Chairman Powell do not plan to raise interest rates for a long time. The talk about possible negative interest rates and concern over a stock market bubble has folks (myself included) thinking that we may be the new Japan. And, if we are, interest rates will not be rising any time soon and it make sense to lock into some yield – any yield whatsoever – on cash that we cannot afford to risk in the market, real estate, bonds, commodities, etc. And, the obvious way to lock in yield is to put your money in a CD or time deposit.

Three months ago, I suggested in this article that depositors look at No Penalty CDs and one-year CDs as a place to hide. At the time, you could still lock into a 1-year CD at 1.35% APY. Now, you cannot (although in certain states, rates at local banks and credit unions may be close to that level - check here and here). You can still get 1.25% APY in a 5-year online CD and perhaps even higher in a bank near you or a credit union near you, but that involves locking your money up for 5 years!

We’re basically two months from an election now. The election brings the possibility of a new Federal Reserve Chairman with a different policy (and less subservient to a President who wanted interests rates at zero even before the pandemic). While there is a lot of talk about asset deflation, all inflation indicators (CPI-U, etc.) suggest that inflation is picking up. It is very possible that we could be in a very different interest rate environment as soon as six months from now.

I could be wrong, but I think it is a good time to just grin and bear it, and stay with online savings and money market accounts.