If you’re carrying a lot of high-interest debt, the fact that the Federal Reserve once again did not cut interest rates at its Wednesday meeting may be disappointing, if not surprising.
But the Fed’s unwillingness to lower rates until it sees more consistent progress in inflation data has — and will continue to — put money in your pocket this year if you have savings and seek out federally insured accounts with the highest rates.
Put bluntly, “It’s a great time for savers,” said Greg McBride, Bankrate.com’s chief financial analyst.
In 2023, savers made $315.4 billion in interest in deposit accounts, four times the $78.7 billion they earned in 2022, according to Lending Tree’s DepositAccounts.com, which used data from the Federal Deposit Insurance Corporation in its calculations.
That’s because, after so many years of paltry interest rates, the Fed’s rate-hike campaign that began in 2022 made it possible for savers to earn inflation-beating yields on their US domestic deposits, including bank and credit union savings accounts, certificates of deposit and money market accounts.
At the same time, yields on Treasury bills have also been very competitive with the higher rates banks are offering and are equally low risk.
If you want to grow your savings while the growing is good, here is what to consider when weighing your options.
The average interest rate on regular bank savings accounts is roughly 0.5% but can run as low as 0.01% at the biggest banks.
By contrast, the average on high-yield savings accounts is well over 4%, according to DepositAccounts.com. And the very best rates on high-yield accounts can be had at FDIC-insured online banks. How high? Between 5% and 5.5%.
Say you have $10,000 in savings. If you leave it parked in a regular savings account at 0.5%, you’ll get $50 in interest for a year. If you put it instead in a 5% high-yield account, you’ll get $500.
A high-yield savings account is the best place to park money you’ll need to cover emergencies as well as anticipated large expenses that you have to pay in the next three months to a year.
As with any savings account, banks can lower the rate they offer — also known as the APY — at any time. And you can be sure they will do just that when the Fed looks like it will finally start cutting rates, McBride said.
But even then, he added, since rates are likely to be cut in small increments, online high-yield savings accounts will continue to offer inflation-beating returns for the foreseeable future.
“They will still offer the best way to preserve your [money’s] buying power,” McBride said.
Money market accounts and money market funds
Although money market deposit accounts and money market mutual funds are both generating yields competitive with the best high-yield savings accounts, there are important differences.
Money market deposit accounts are bank products. So, assuming your bank is FDIC insured, your account is too. (Or, if your account is at a federally backed credit union, your money will be insured by the National Credit Union Share Insurance Fund.)
As with high-yield accounts, you may get the best deals at an online bank. But money market accounts may have a higher minimum deposit requirement than a high-yield account.
Money market funds, by contrast, are an investment product — they generate return by investing in short-term, low-risk debt instruments and are currently yielding an average of 5.13%, according to the Crane 100 Money Fund Index. Such funds are a good place to park cash you have in your brokerage account that you may want to use at some point to buy equities or bonds, McBride said. Money market funds are not FDIC-insured, but any brokerage you use should be insured by the Securities Investor Protection Corporation, which covers your funds up to a limit if your brokerage ever goes under.
CDs are still a great place to park any money you can leave untouched for a fixed period of time — anywhere from a few months to five years.
If you have to withdraw the money early, you can always get all of your principal back but may forfeit some of the interest earned as an early withdrawal penalty.
While your brick-and-mortar bank may offer a CD at a good rate, you may get a better one shopping around. The easiest way to do that without having to set up an additional account at another bank is to shop for CDs through your online brokerage, which is likely to offer a wide array of CDs from many different banks.
At Schwab.com on Wednesday, the average rates for CDs on offer ranging in maturity from three to six months topped 5.35%. Those ranging in maturity from nine to 18 months were between 5.38% and 5.45%.
Longer term, a two-year CD averaged 5.4%, while a three-year averaged 5.25%.
Treasury bills and notes
Beyond deposit accounts, investing in short-term Treasury bills and notes has been another way to earn a competitive return with virtually no risk since Treasuries are backed by the full faith and credit of the United States.
While the Fed said Wednesday it would slow the pace of its quantitative tightening program, which can have the effect of lowering Treasury yields, that easing is unlikely to have nearly as large an effect on short-term rates as the actual guidance and decision the central bank offers on its benchmark rate, said Ben Bakkum, senior investment strategist at Betterment, a robo-advisory financial services firm.
Collin Martin, a fixed income strategist at the Schwab Center for Financial Research, said “We don’t expect Treasury bill yields to drop much until it becomes clear that Fed rate cuts are on the horizon, but the timing of a potential cut continues to get pushed back given stronger-than expected inflation. As long as the Fed holds its rate in the 5.25% to 5.5% range, we expect most Treasury bill yields to hover around 5.25% as well.”
As for Treasury notes, which have maturities between two and 10 years and are most sensitive to the Fed’s guidance on rates, Martin expects their yields to stay in the 4.5% to 5% range until there is indication a rate cut may be on tap, at which point they may fall modestly, he said.
As with a CD, you need to invest money in a Treasury for a given period — typically, a few months to a few years. Three- and six-month T-bills had yields of roughly 5.4% each on Wednesday, according to Schwab.com, while nine-month and one-year bills were offering 5.32% and 5.23%, respectively. Two-year notes were at 5.05%.
When deciding whether it makes sense to invest in a CD or a Treasury for the same duration, you might opt for the Treasury if you live in a high-tax state, McBride suggested, since interest on Treasuries is exempt from state and local taxes.
In all instances, the easiest way to purchase Treasuries and other bonds is to do so through your brokerage account.
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