Probably the Worst Moment in the History of Mankind to be Locking into Long Term CDs

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.