As interest rates have begun to rise, some BestCashCow readers have asked about ways that they can get out of paying early withdrawal fees on long-term Certificates of Deposit that they may have bought a couple of years ago, but that are no longer attractive.

As I stated in an earlier article, I strongly recommend against breaking any CD until the rate that you are earning falls below the current rates on comparable savings rates. In a rising rate environment, you do not want to break a CD in order to get another CD that you may then need to break. I have 2 years left on a 5-year CD at 2.25% and I will not break it until online savings rates are firmly above 2.25%.

If you do need to withdraw your money early, the withdrawal is entirely at the discretion of the bank or credit union. Most banks and credit unions will waive it because of death or adjudged incompetence of the holder, or because a bank merger causes the holder to be over FDIC limits. Early termination fees may be waived due to other hardships at the bank’s or credit union’s discretion.

Reg D forbids banks from allowing any withdrawal within 7 days of issuance (this restriction also applies to No Penalty CDs), but there are no other limits on a bank’s ability to waive early withdrawal fees. Any bank officer (or other website) that will tell you that they are lawfully required to charge the early withdrawal fee is misinformed.

However, a contract is a contract and you enter into a time deposit contract when you purchase a CD. When you break a contract, any contract, the counterparty has a right to extract penalties. In this case, the bank has made commitments based on its expectation that they are borrowing the money for the course of the CD at the indicated rate.

As with any contract, the party entitled to a penalty can exercise its discretion not to extract the penalty (to waive it). But, if I were an officer of a bank or credit, I would not be inclined to waive it simply because the customer can now get a higher rate. Would I waive it if the customer committed to do further business with my bank or credit union? Would I waive it on a one-time basis if the customer agreed to roll into a higher yielding but longer term CD? Maybe.

Forbes, the financial magazine that had been deceived for decades into believing that Donald Trump was a billionaire, is running an interesting advertisement on LinkedIn, Twitter and Facebook.

They are encouraging social-media users to consider a 3-month CD in lieu of keeping their money in savings accounts. The advertisement posits that 3-month CDs are a great way to lock-in a short-term rate without locking up cash for a long period. Those clicking through the ad to the Forbes website will land on a page of Forbes.com that lists several 3-month CD rates with the highest paying 0.20% APY. The best current online savings rates are currently 0.70%, and locally available savings rates are a little higher in some markets (check local savings rates where you live here).

One-year CDs and even six-month CDs have in fact been a great way to secure interest payments going forward in an environment where interest rates are falling. Through my use of the BestCashCow tables I have been fortunate to still have CDs that are paying close to 2% that don’t come due until the summer. If you believe that savings rates will continue to decline through 2021, and do not require immediate liquidity, you would put some of your cash into these instruments where you can lock in 0.60% to 0.70% through the remainder of the year.

3-month CDs, however, never pay much of a premium above the prevailing savings rate. In the current environment, they are paying a whole lot less. In fact, you would have to believe that all online savings rates are going to go to zero (or that you will be paying the bank to hold your money) within the next month to make locking into a 3-month CD rate at 0.20% even remotely worthwhile. With the 10-year US Treasury rate now firmly back above 1%, that is absolutely not a bet to make.

Online savings rates have performed very poorly versus a lot of competing places for your money. But, one thing they are guaranteed to do is to outperform is 3-month CDs.

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.