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.

My inbox is full of two types of emails from readers of BestCashCow and RatesAndInfo.com, a BestCashCow subsidiary.

The first is from those who are excited to have found a great CD rate, and the second is from those who are inquiring whether this is the time to lock into a short-term or long-term CD.

I understand the excitement. Interest rates have been stuck at zero for 24 months due to Fed Chairman Jerome Powell’s mismanagement of Fed policy during the pandemic. While inflation has burned, people have become accustomed to making no more than half a percent in their savings accounts. And, they are now seeing 1-year online CD rates as high as 1.50%, 3-year CD rates above 2%, and 5-year CD rates pushing 2.50%. In some areas, local CD rates are even higher.

Check local 1-year CD rates here.

Check local 3-year CD rates here.

Check local 5-year CD rates here.

I wrote a year ago that folks should not be locking into long-term CDs when interest rates are so close to zero. In an environment where they are still low and projected to go up dramatically in the immediately future, they should be avoiding not just long term CDs, but short term ones as well.

The Fed is about to play some serious catch-up in order to try to get inflation under control. It is going to raise the Fed fund rate by 1%, possibly more, between now and June 15, some six weeks away. Online savings rates by then should be above 1.50%.

The Fed is projected to raise the Fed funds rate by another 1% through quarter point hikes at each of its four remaining meetings in the second half of the year. It could easily raise the benchmark rate by more to get inflation under control (although it also could be influenced, again, to refrain from moves ahead of an election). Even if the Fed is does not follow through, certificate of deposit rates are not offering a premium which prices in the likelihood of these moves.

Inflation - especially against the backdrop of a global war, a continued pandemic and an expanding environmental catastrophe - can be very persistent. It is anybody's guess as to whether and how the Federal Reserve may need to take further action into 2023.

I personally would continue to monitor and compare online savings rates as rates increase through the remainder of 2022. You should also check local rates where you live.

And, then at the end of the year, I would begin to look at CDs, but I’d expect to see all CD products well above where they are today.

I was recently contacted by a reader about 5-year CD rates. Given that the best rate available at any online bank, local bank or credit union remains not much better than 1%, I have long and strongly admonished that it would not be a good idea to lock in right now.

The reader pointed out that they are staying true to their program that involves rolling over 5-year CDs as they mature.

I am in favor generally of adhering to programs through thick and thin, but this is absolutely not the time to do it. At no time have we experienced such tremendous inflationary pressures against a Federal Reserve that is so intent on holding its benchmark Fed Funds rate artificially low (at zero !!). These circumstances have created bubbles all over the place - in cryptocurrencies, in real property, and in just about any asset. And, even if Jerome Powell stands to be correct that inflation is transitory and that the Fed needs to maintain rates at this level to ensure a smooth recovery from the virus, you should not expect cash rates (savings and CD rates) to hold at these levels for the next 5 years.

In 2005 and 2006, online savings rates were above 4%. Within the last three years, they have been well above 2%. There will be competition for your money again. In fact, even today as banks are supposedly flush with cash, there are plenty of banks offering over 50 basis points in online savings and money market accounts.

To forfeit liquidity and lock in to a 50 basis point premium over savings rates (a doubling) for the moment against such an uncertain future is simply foolhardy, unless you can find a bank or credit union that will agree in writing to waive all early withdrawal penalties.

The bottom line is that inflation probably isn’t transitory and that higher rates are coming, but if you insist on hedging against rates moving lower, then buy a one-year CD.