The recent forecast from the Federal Reserve on a slower pace of interest rate cuts could be discouraging for many, particularly those in debt. However, those with funds in high-yield cash accounts could potentially benefit from a longer duration of higher rates, according to experts.
Greg McBride, a chief financial analyst at Bankrate, suggests that if your money is placed correctly, 2025 could prove to be a profitable year for savers, much like 2024 was.
Why ‘higher for longer’ is the catchphrase for 2025
The returns on cash holdings generally have a direct correlation with the Fed’s benchmark interest rate. This means if the Fed raises interest rates, the rates for high-yield savings accounts, certificates of deposit, money market funds, amongst other forms of cash accounts, usually rise too.
The Fed had aggressively increased its benchmark rate in 2022 and 2023 to control high inflation, which resulted in borrowing costs reaching their highest level in over 22 years. They began to reduce the rates in September. However, Fed officials predicted this month that there would only be two rate cuts in 2025, two less than what was initially expected three months prior.
“The mantra for 2025 is ‘higher for longer’,” said McBride. “The significant change since September can be attributed to the Fed’s upward revisions to their own inflation projections for 2025.”
The pros and cons for consumers
While higher interest rates increase the cost of borrowing, they can also help individuals of all ages to build savings and prepare for emergencies or opportunities, according to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth.
Savings accounts that provide a high yield, with interest rates between 4% and 5%, are still widespread, according to McBride. In contrast, the highest-yielding accounts only paid around 0.5% in 2020 and 2021.
However, not all financial institutions offer these rates. The most competitive returns for high-yield savings accounts are usually from online banks, rather than traditional brick-and-mortar establishments.
Considerations for cash investments
Investors should be aware of certain factors. For instance, whether a high-yield savings account or a CD is better, is a commonly asked question. Cheng explains that while high-yield savings accounts provide more liquidity and accessibility, the interest rate is not fixed or guaranteed. On the other hand, a CD offers a fixed guaranteed interest rate, but you sacrifice liquidity and access.
Also, some institutions may require a minimum deposit to access certain advertised yields. Not all institutions offering high-yield savings accounts are covered by Federal Deposit Insurance Corp. protections, warns McBride. Ensure your money is sent directly to a federally insured bank and avoid fintech intermediaries that rely on third-party partnerships with banks for FDIC insurance.
The recent bankruptcy by fintech company, Synapse, serves as a reminder of this often overlooked risk. Many Synapse customers found themselves unable to access most, or all, of their savings.
