Warming Slightly to Certificates of Deposit

I advised readers of BestCashCow.com in April to be especially weary of jumping into CDs with interest rates about to rise.

I still believe interest rates have a lot further to rise. Even though oil and gas and other commodity prices have declined in recent weeks, the Fed remains behind the ball with the Fed funds rate at a target 2.25 to 2.50%. With four more meetings to go before the end of the 2022, I’d bet that the Fed funds rate winds up somewhere between 3.50 and 4% in December, before peaking sometime in February.

Many blog writers who follow our space have noted that the last time that the Fed funds rate was at the current level, just prior to lowering rates on July 31, 2019, savings and money market account rates from the largest, most recognized online banks were yielding a rate within the Fed funds target. They have hypothesized that these banks, like Marcus By Goldman Sachs that now has a savings rate of 1.50%, are either flush with liquidity or are simply hoping that customers won’t recognize that they are no longer offering rates that are consistent with a Fed funds rate above 2%. (BestCashCow has a full page of nationally available savings offers that are now above 2% here).

The reluctance of most major online banks to match the current Fed funds rate is one driver leading folks to look at CDs. Another driver is a growing view that no matter what happens with inflation, the Fed will pivot to lowering rates again in 2023.

If your interest in CDs is driven by the low rates in major banks, you could consider short-term CDs (one year or less) with the expectation that you will be able to lock in a higher rate at maturity. They do offer a premium over savings accounts today and may even after one our two more Fed moves.

If your concern is a Fed pivot, you’d want to look at longer term CDs (three years to five years).

It has also come to my attention that there are brokered CDs being offered that are competitive with online rates. We ordinarily do not recommend brokered CDs – offered through places like ETrade, Fidelity, Vanguard or full service brokers – because they lack the ability for early withdrawal with payment of an early withdrawal fee, they need to be purchased a week or two before they are actually issued (during which time you are not earning interest so your effective rate is lower), and they are ordinarily not rate-competitive with the leading rates.

If you are locking into long-term CDs, you should avoid brokered CDs now more than ever. Three-year, four-year and five-year online CDs will ordinarily provide you with the ability to get out with payment of an early withdrawal fee if you need access to your cash or if interest rates should wind up much higher in one year. However, please read our warning about reliance of early withdrawal fees here.

At the same time, readers of BestCashCow are writing to us asking whether they should buy 6-month brokered CDs at 2.70% or stay in online savings and money accounts with banks that are not responding to the recent Fed funds increases. While my answer to these folks is generally that they should seek out higher earning online or local savings accounts, I also think that as long as they are not impairing their liquidity, there is very little to lose by locking into very short-term brokered CDs right now.