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Many people, especially those with debt, will be disappointed by the Federal Reserve’s recent outlook that the pace of interest rate cuts will be slower than previously expected.
But experts say others who park their money in high-yield cash accounts will benefit from a “long-term high interest rate” regime.
“If you manage your money well, 2025 will be just as good a year for savers as 2024 was,” said Greg McBride, chief financial analyst at Bankrate.
Why the 2025 “mantra” will rise for the long term
The return on cash holdings is generally correlated to the Fed’s benchmark interest rate. When the Fed raises interest rates, it typically also increases interest rates on high-yield savings accounts, certificates of deposit, money market funds, and other types of cash accounts.
The Fed aggressively raised its benchmark interest rate in 2022 and 2023 to curb high inflation, ultimately raising the cost of borrowing from rock-bottom rates to the highest level in more than 22 years.
Restrictions began in September. But Fed officials this month said they now expect to cut rates only two times in 2025, instead of the four they expected three months ago.
“There is a belief that it will be higher in the long term, heading into 2025,” McBride said. “The large change since September is explained by a notable upward revision to the Fed’s own 2025 inflation forecast.”
Good news and bad news for consumers
The bad news for consumers is that rising interest rates will increase the cost of borrowing, said J.D., a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. Margherita Chen said.
”[But] Rising interest rates help individuals of all ages and stages build savings and prepare for potential emergencies and opportunities. That’s good news,” said Chen, a member of CNBC’s Financial Advisors Council.
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McBride said high-yield savings accounts that pay 4% to 5% interest “remain popular.”
By comparison, high-yield accounts paid about 0.5% in 2020 and 2021.
The same goes for money market funds, he explained.
Interest rates on money market funds vary by fund and institution, but higher-yielding funds are typically in the 4% to 5% range.
However, not all financial institutions pay these interest rates.
High-yield savings account returns are most competitive from online banks, and not from traditional brick-and-mortar stores down the street, which can pay returns of, say, 0.1%, McBride said. .
Points to note when paying in cash
Of course, there are some things investors should consider.
People always wonder whether a high-yield savings account or a CD is better, Chen said.
“It depends,” she said. “High-yield savings accounts offer more liquidity and access, but the interest rate is not fixed or guaranteed. Both the interest rate and principal can fluctuate. CDs offer a fixed, guaranteed interest rate, but , you waive liquidity and guarantees.
Additionally, experts say some financial institutions impose minimum deposit requirements to earn a certain advertised yield.
Additionally, not all financial institutions that offer high-yield savings accounts necessarily qualify for the protection of the Federal Deposit Insurance Corporation, McBride said. Deposits of up to $250,000 are automatically protected in the event of failure at each FDIC-insured bank.
“Make sure you send money directly to a bank that is federally insured,” McBride said. “I would avoid fintech intermediaries that rely on third-party partnerships with banks for FDIC insurance.”
The recent bankruptcy of one fintech company, Synapse, highlights “unrecognized risks,” McBride said. Many of Synapse’s customers no longer have access to most or all of their savings.
